Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
Lesson 14
Managerial Accounting II: Application
Self-Test
I. True and False Questions
1. Decision making is a distinct management activity that should be separated from budgeting,
directing, and controlling activities. (F)
2. The concept of the relevant range does not apply to fixed costs. (F)
3. A cost formula may not be valid outside the relevant range of activity. (T)
4. The high-low method is generally less accurate than the least-squares regression method for
analyzing the behaviour of mixed costs. (T)
5. The high-low method should be preceded by a scatter graph plot. (T)
6. Because the least-squares regression method is more accurate, a scattergraph plot is
unnecessary. (F)
7. The break-even point in units can be obtained by dividing total fixed expenses by the
contribution margin ratio. (F)
8. For a given level of sales, a low contribution margin ratio will produce less net income than a
high contribution margin ratio. (T)
9. The formula for the break-even point is the same as the formula to attain a given target profit
for the special case where the target profit is zero. (T)
10. The margin of safety percentage is equal to the margin of safety in dollars divided by total
sales in dollars. (T)
11. The usual starting point in budgeting is to make a forecast of cash receipts and cash
disbursements. (F)
12. Budgets are used for planning rather than for control of operations. (F)
13. A production budget is to a manufacturing firm as a merchandise purchases budget is to a
merchandising firm. (T)
14. Zero-based budgeting requires managers to justify all costs of programs as if these programs
were being proposed for the first time. (T)
15. The material quantity variance is computed based on the quantity of all materials purchased
during the period. (F)
16. Standard costs should generally be based on the actual costs of prior periods. (F)
17. Purchase of poor quality materials will generally result in a favourable materials price
variance and an unfavourable labour rate variance. (F)
18. A flexible budget is "flexible" in the sense that a budget can be prepared for any level of
activity, but once a budget is set the budget figures are not changed if actual activity later
proves to be different than budgeted activity. (F)
19. In responsibility accounting, each segment in an organization should be charged with the costs
for which it is responsible and over which it has control plus its share of common
organizational costs. (F)
II. Multiple Choice Questions
1. Management plans are expressed formally in which of the following documents? (C)
A. Performance reports.
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
B. The annual report to shareholders.
C. Budgets.
D. All of the above.
2. What would be an example of a performance report? (B)
A. An income statement reporting actual results for the past month.
B. A production report showing budgeted and actual production for the past month.
C. An income statement showing the amounts budgeted for the past month.
D. A balance sheet showing the actual financial position at the end of the past month.
3. The linear equation Y = a + bX is often used to express cost formulas. Which of the following
representations in this equation is correct? (D)
A. The a term represents variable cost in total.
B. The X term represents total costs.
C. The Y term represents total fixed costs.
D. The b term represents variable cost per unit of activity.
4. Contribution margin is the excess of revenues over which of the following? (B)
A. Cost of goods sold.
B. All variable costs.
C. Manufacturing cost.
D. All direct costs.
5. The break-even in units sold will decrease if there is an increase in which of the following?
(B)
A. Unit sales volume.
B. Selling price.
C. Unit variable expenses.
D. Total fixed expenses.
6. The margin of safety is equal to which of the following formulas? (A)
A. Sales - (Fixed expenses/Contribution margin ratio).
B. Sales - Net income.
C. Sales - (Variable expenses/Contribution margin).
D. Sales - (Variable expenses + Fixed expenses).
7. The cash budget must be prepared before you can complete which of the following? (A)
A. Budgeted balance sheet.
B. Production budget.
C. Raw materials purchases budget.
D. Schedule of cash disbursements.
8. The master budget process usually begins with which of the following? (B)
A. Production budget.
B. Sales budget.
C. Operating budget.
D. Cash budget.
9. What does an unfavourable labour efficiency variance indicate? (D)
A. The actual labour rate was higher than the standard labour rate.
B. The labour rate variance must also be unfavourable.
C. Overtime labour was used during the period.
D. Actual labour hours worked exceeded standard labour hours for the production level achieved.
10. If the actual labour hours worked exceed the standard labour hours allowed, what type of
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
variance will occur? (A)
A. Unfavourable labour efficiency variance.
B. Favourable labour rate variance.
C. Favourable labour efficiency variance.
D. Unfavourable labour rate variance.
11. Which department is usually held responsible for an unfavourable materials quantity variance?
(C)
A. Marketing.
B. Purchasing.
C. Production.
D. Engineering.
12. Which of the following best describes a segment of a business responsible for both revenues
and expenses? (D)
A. A cost centre.
B. An investment centre.
C. A residual income centre
D. A profit centre.