NAME:

ID NO.:

STRATEGIC COST MANAGEMENT

MIDTERM EXAMINATION

DIRECTION: Encircle the correct. Use permanent ink. Strictly no erasure.

1. To which function of management is CVP analysis most applicable?

A. Planning C. Directing
B. Organizing D. Controlling

2. The systematic examination of the relationships among selling prices, volume of sales and
production, costs, and profits is termed:
A. contribution margin analysis C. budgetary analysis
B. cost-volume-profit analysis D. gross profit analysis

3. The term contribution margin is best defined as the:

A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs.

4. Cost-volume-profit analysis allows management to determine the relative profitability of a

product by
A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of
production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum.

5. Cost-volume-profit analysis cannot be used if which of the following occurs?

A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change.
C. The total fixed costs change.
D. Per unit sales prices change.

6. The most useful information derived from a breakeven chart is the

A. Amount of sales revenue needed to cover enterprise variable costs.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Relationship among revenues, variable costs, and fixed costs at various levels of activity.
D. Volume or output level at which the enterprise breaks even.
7. Which of the factors is (are) involved in studying cost-volume-profit relationships?
A. Levels of production C. Fixed costs
B. Variable costs D. All of these

8. At the breakeven point, fixed cost is always

A. Less than the contribution margin C. More than the contribution margin
B. Equal to the contribution margin. D. More than the variable cost

9. At the break-even point:

A. net income will increase by the unit contribution margin for each additional item sold
above break-even.

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B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase

10. In cost-volume-profit analysis, the greatest profit will be earned at

A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
D. The point at which marginal cost and marginal revenue are equal.

11. Which of the following is not an assumption underlying C-V-P analysis?

A. The behavior of total revenue is linear.
B. Unit variable expenses remain unchanged as activity varies.
C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold.

12. Which of the following assumptions is inherent to C-V-P analysis?

A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
D. The relevant range is not a consideration.

13. In a profit-volume graph, the slope of the profit curve represents

A. the contribution margin per unit D. total contribution margin
B. the selling price per unit E. total revenues.
C. the variable cost per unit

14. Which of the following assumptions is closely relevant to cost-volume-profit analysis?

A. for multiple product analysis, the sales mix is not important
B. inventory levels remain unchanged
C. total fixed costs and unit variable costs can be identified and remain constant over the
relevant range
D. B and C
15. Given the following notations, what is the breakeven sales level in units?
SP = selling price per unit
FC = total fixed cost
VC = variable cost per unit
A. SP / (FC/VC) C. VC/(SP – FC)
B. FC/(VC/SP) D. FC/(SP – VC)
16. Green Corporation expects to sell 3,000 plants a month. Its operations manager estimated the
following monthly costs:
Variable costs P 7,500
Fixed costs 15,000
What sales price per plant does she need to achieve to begin making a profit if she sells the
estimated number of plants per month?
A. P7.51 C. P5.00
B. P7.50 D. P2.50

17. An organization's break-even point is 4,000 units at a sales price of P50 per unit, variable cost
of P30 per unit, and total fixed costs of P80,000. If the company sells 500 additional units, by
how much will its profit increase?
A. P25,000 C. P10,000
B. P15,000 D. P12,000

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18. Consider the following:
Fixed expenses P78,000
Unit contribution margin 12
Target net profit 42,000
How many unit sales are required to earn the target net profit?
A. 15,000 units C. 12,800 units
B. 10,000 units D. 20,000 units

19. Carribean Company produces a product that sells for P60. The variable manufacturing costs
are P30 per unit. The fixed manufacturing cost is P10 per unit based on the current level of
activity, and fixed selling and administrative costs are P8 per unit. A selling commission of 10%
of the selling price is paid on each unit sold.
The contribution margin per unit is:
A. P24. C. P30.
B. P36. D. P54.

20. Seal Yard Ornaments sells lawn ornaments for P15 each. Seal's contribution margin ratio is
40%. Fixed costs are P32,000. Should fixed costs increase 30%, how many additional units
will Seal have to produce and sell in order to generate the same net profit as under the current
conditions?
A. 1,600. C. 6,933.
B. 5,333. D. 1,067.

21. At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed expenses
were P50,000. The profit from the 5,001st unit would be?
A. P10 C. P15
B. P50 D. P12

22. Galactica Company has fixed costs of P100,000 and breakeven sales of P800,000. Based on
this relationship, what is its projected profit at P1,200,000 sales?
A. P 50,000 C. P150,000
B. P200,000 D. P400,000
23. The sales price per unit will increase from P32 to P40. The variable cost per unit will remain at
P24, and the fixed costs will remain unchanged at P400,000. How many fewer units must be
sold to break-even at the new sales price of P40 per unit?
A. 25,000 C. 10,000
B. 2,500 D. 12,500

24. The Hard Company sells widgets. The company breaks even at an annual sales volume of
80,000 units. At an annual sales volume of 100,000 units the company reports a profit of
P220,000. The annual fixed costs for the Hard Company are:
A. P 880,000 C. P 800,000
B. P1,100,000 D. P1,000,000

25. Albatross Company has fixed costs of P90,300. At a sales volume of P360,000, return on
sales is 10%; at a P600,000 volume, return on sales is 20%. What is the break-even volume?
A. P225,000 C. P301,000
B. P258,000 D. P240,000

26. An entity has fixed costs of P200,000 and variable costs per unit of P6. It plans on selling
40,000 units in the coming year. If the entity pays income taxes on its income at a rate of
40%, what sales price must the firm use to obtain an after-tax profit of P24,000 on the 40,000
units?
A. P11.60 C. P12.00

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B. P11.36 D. P12.50

27. The following is the Lux Corporation's contribution format income statement for last month:
Sales P2,000,000
Less variable expenses 1,400,000
Contribution margin 600,000
Less fixed expenses 360,000
Net income P 240,000
The company has no beginning or ending inventories. A total of 40,000 units were produced
and sold last month. What is the company's degree of operating leverage?
A. 0.12 C. 2.50
B. 0.40 D. 3.30
28. Which of the following statements is false?
A. At zero production level, fixed costs is also zero.
B. At zero production level, fixed costs are positive.
C. At zero production level, variable costs are usually zero.
D. At zero production level, total costs equal total fixed costs.

29. Variable costs are all costs

A. Of manufacturing incurred to produce units of output.
B. That are associated with marketing, shipping, warehousing, and billing activities.
C. That fluctuate in total in response to small changes in the rate of utilization of capacity.
D. That do not change in total for a given period and relevant range but become progressively
smaller on a per unit basis as volume increases.

30. Weaknesses of the high-low method include all of the following except
A. the mathematical calculations are relatively complex.
B. the high and low activity levels may not be representative.
C. only two observations are used to develop the cost function.
D. the method does not detect if the cost behavior is nonlinear.
31. The term “relevant range” as used in cost accounting means the range over which
A. costs may fluctuate
B. cost relationships are valid
C. production may vary
D. relevant costs are incurred

32. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called
a
A. mixed cost.
B. predictor.
C. direct cost.
D. cost driver.
33. Which of the following describes the behavior of the variable cost per unit? Variable cost:
A. Varies in increasing proportion with changes in the activity level.
B. Varies in increasing proportion with changes in the activity level.
C. Remains constant with changes in the activity level.
D. Varies in direct proportion with the activity level.

34. A cost that remains constant on a per unit basis in a given period despite changes in the level of
activity should be considered a(an):
A. variable cost.
B. prime cost.
C. fixed cost.

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D. overhead cost.

35. When the number of units manufactured increases, the most significant change in unit cost will be
reflected as a(n)
A. increase in the fixed element.
B. decrease in the variable element.
C. increase in the mixed element.
D. decrease in the fixed element.
36. Which of the following best describes a fixed cost?
A. It may change in total when such change is unrelated to changes in production.
B. It may change in total when such change is related to changes in production.
C. It is constant per unit of change in production.
D. It may change in total when such change depends on production within the relevant range.

37.If activity increases, which of the following statements about cost behavior is true?
A. Fixed cost per unit will increase
B. Variable cost per unit will increase
C. Fixed cost per unit will decrease
D. Variable cost per unit will decrease

38. Which of the following statements regarding fixed costs is incorrect?

A. Expressing fixed costs on a per unit basis usually is the best approach for decision-making process.
B. Fixed costs expressed on a per unit basis will react inversely with changes in activity.
C. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept of
the relevant range.
D. Fixed costs frequently represent long-term investments in property, plant, and equipment.

39. The increased use of automation and less use of the work force in companies has caused a trend
towards an increase in
A. both variable and fixed costs.
B. fixed costs and a decrease in variable costs.
C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.
40. The period that begins with the arrival of materials and ends with the shipment of a completed
good is the
a. cycle time.
b. manufacturing cell.
c. computer-integrated manufacturing.
d. performance period.
41. A cost is variable if it varies with the
a. number of units manufactured.
b. number of units sold.
c. level of some activity.
d. selling price of the product.
42. The components of manufacturing cost are
a. variable costs, fixed costs, and overhead costs.
b. materials, direct labor, and overhead.
c. purchases, wages, and manufacturing overhead.
d. wages and salaries, maintenance and repairs, utilities, and depreciation.
43. As volume increases,
a. total fixed costs remain constant and per-unit fixed costs increase.

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 b. total fixed costs remain constant and per-unit fixed costs decrease.
c. total fixed costs remain constant and per-unit fixed costs remain constant.
d. total fixed costs increase and per-unit fixed costs increase.
44. A mixed cost
a. increases in steps as volume increases.
b. contains a fixed component and a variable component.
c. varies with more than one measure of volume.
d. cannot be accurately predicted.
45. The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
A. Incremental cost. C. Marginal cost.
B. Margin of safety. D. Opportunity cost.

46. As an accountant, the most useful information you can get from break-even chart is the
A. Volume or output level at which the enterprise breaks even.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Amount of sales revenue needed to cover enterprise variable costs.
D. Relationship among revenues, variable costs, and fixed costs at various levels of activity.

47. The Austin Manufacturing Company wants to develop a cost estimating equation for its monthly
cost of electricity. It has the following data:
Month Cost of Direct Labor Hours
Electricity
January $6,750 1,500
April 7,500 1,700
July 8,500 2,000
October 7,250 1,600
Using the high-low method, what is the best equation?
A. Y = $750 + $3.50X D. Y = $1,500 + $5.00X
B. Y = $750 + $5.00X E. Y = $2,000 + $3.50X
C. Y = $1,500 + $3.50X

. 48. RST’s average cost per unit is the same at all levels of volume. Which of the following is true?
A. RST must have only fixed costs.
B. RST must have only variable costs.
C. RST must have some fixed costs and some variable costs.
D. RST’s cost structure cannot be determined from this information.

49. The final figure in the Schedule of Cost of Goods Manufactured represents the
a. cost of goods sold for the period.
b. total cost of manufacturing for the period.
c. total cost of goods started and completed this period.
d. total cost of goods completed for the period.

50. The formula for cost of goods sold for a manufacturer is

a. beginning Finished Goods Inventory plus Cost of Goods Manufactured minus ending
Finished Goods Inventory.p
b. beginning Work in Process Inventory plus Cost of Goods Manufactured minus ending
Work in Process Inventory.
c. direct material plus direct labor plus applied overhead.
d. direct material plus direct labor plus overhead incurred plus beginning Work in Process
Inventory.

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