Principles of Financial and Managerial Accounting Exam (D196)

Explanation:

In managerial accounting, a cost driver is a factor that causes or influences the cost of certain business activities. It is used to allocate indirect costs more accurately by identifying what drives those costs. For example, machine hours or labor hours may be cost drivers that directly influence the total amount of overhead incurred. Understanding cost drivers helps managers better control costs and make more informed decisions.

Correct Answer:

A factor that influences the total expenses incurred by a business.

Why Other Options Are Wrong:

A method for calculating fixed costs associated with production

Cost drivers do not calculate fixed costs. Fixed costs remain unchanged regardless of production level, and cost drivers are typically associated with variable or overhead costs. This option confuses the concept of cost behavior with cost assignment.

A variable that determines the pricing strategy of a product

While pricing strategies may consider costs, a cost driver is not directly used to set prices. Pricing involves market analysis, perceived value, and competition, not just internal cost drivers. This option misrepresents the purpose of a cost driver in cost analysis.

A measurement of the efficiency of production processes

Efficiency metrics assess how well inputs are converted into outputs. Although cost drivers may relate to efficiency, they are not efficiency measurements themselves. This answer confuses performance metrics with cost allocation tools.

Explanation:

The Contribution Margin Ratio (CMR) represents the portion of sales that contributes to covering fixed costs and profits. If CMR = 25%, then variable cost ratio = 1 − 0.25 = 75%. Total variable costs = 75% × $500,000 = $375,000. To find the variable cost per unit, divide total variable costs by the number of units sold: $375,000 ÷ 50,000 = $7.50 per unit. This value represents the cost per unit that varies with production and sales volume.

Correct Answer:

$7.50

Why Other Options Are Wrong:

$5.00: This amount assumes a much lower variable cost ratio than the actual 75%. Using this figure would overstate the contribution margin and operating profits, leading to inaccurate financial analysis and poor decision-making.

$6.00: While closer, this still underestimates the correct variable cost per unit. It would incorrectly imply a higher contribution margin ratio than 25%, creating misleading break-even and pricing calculations.

$8.00: This value overstates the variable cost per unit, suggesting that variable costs consume 80% of sales revenue. Using this would undervalue the contribution margin, making products seem less profitable than they actually are.

Explanation:

Period costs are expenses that are not tied directly to the production of goods and are expensed in the period in which they are incurred. They typically include selling, general, and administrative expenses. Advertising expenses are a classic example of a period cost because they are related to promoting and selling the product rather than manufacturing it. These costs do not become part of the cost of inventory and are instead reported as expenses on the income statement in the period they occur.

Correct Answer:

Advertising expenses

Why Other Options Are Wrong:

Direct labor costs

Direct labor is part of the manufacturing process and can be directly traced to the production of specific goods. Because of this, it is treated as a product cost, not a period cost. It becomes part of inventory until the goods are sold.

Factory utilities

Utilities used in the production facility are considered part of manufacturing overhead. Since they are necessary to operate the plant, they are included in product costs rather than being expensed immediately as period costs.

Depreciation on production equipment

This is a manufacturing overhead cost because it relates to assets directly used in production. Like other product costs, it is assigned to inventory and only recognized as an expense (cost of goods sold) when the related products are sold.

Correct Answer:

increase as production decreases

Explanation:

Fixed costs remain constant in total regardless of production volume, but when measured on a per-unit basis, they vary inversely with output. If fewer units are produced, the total fixed cost is divided among fewer units, making the cost per unit higher. For example, if rent is $1,000 and you produce 10 units, rent per unit is $100—but if only 5 units are made, it's $200 per unit.

Why Other Options Are Wrong:

decrease as production decreases

This is the opposite of what actually happens. When production drops, fixed costs are spread over fewer units, so the cost per unit increases, not decreases.

remain the same as production levels change

While total fixed costs stay the same, fixed costs per unit do not. They fluctuate depending on the number of units produced. So, this statement is incorrect in the context of per-unit cost.

increase as production increases

As production rises, fixed cost per unit actually goes down because the same total cost is spread over more units. So, this choice misrepresents the behavior of fixed costs.

Explanation:

Variable costs are those that change in total as production volume changes, but remain constant on a per-unit basis. If production doubles from 10,000 to 20,000 units, the total variable cost will also double, because each unit incurs the same variable cost. However, the variable cost per unit does not change—it stays the same regardless of how many units are produced. Therefore, both “total variable costs would increase” and “the variable cost per unit would stay the same” are correct.

Correct Answer:

B and C

Why Other Options Are Wrong:

total variable costs would remain the same

This is incorrect because variable costs increase with production. If output increases from 10,000 to 20,000 units, total variable costs will also increase in direct proportion. This choice falsely assumes variable costs behave like fixed costs, which remain constant in total regardless of output.

total variable costs would increase

This is only partially correct. While total variable costs do increase with output, the question asks how variable costs would be affected in general. The answer is not complete without also noting that per-unit variable cost stays the same.

the variable cost per unit would stay the same

This is also only partially correct. While it's true that the variable cost per unit remains unchanged, this answer doesn't address the change in total variable cost, which is also affected by increased production. Hence, it misses the full scope of the cost behavior.

Explanation:

Period costs are those not directly tied to the production of goods and are expensed in the period incurred. They typically include selling expenses (like advertising and sales commissions) and administrative expenses (like office salaries and utilities). These costs are reported on the income statement rather than included in inventory.

Correct Answer:

selling expenses or administrative expenses

Why Other Options Are Wrong:

administrative expense or production expenses

Production expenses are product costs, not period costs. Product costs are capitalized into inventory until sold, while period costs are expensed immediately.

selling expenses or production expenses

Again, production expenses fall under product costs, so this option incorrectly mixes period and product costs.

general expenses or selling expenses

General expenses is not a standard classification in accounting. The proper breakdown is selling and administrative, not selling and “general.”

Correct Answer:

a responsibility center, product, or service to which cost is to be assigned.

Explanation:

A cost object is anything for which cost data is desired. This can be a product, department, project, customer, or any business segment. It serves as the target for cost assignment and is essential for understanding profitability and managing expenses. In cost accounting, identifying the correct cost object allows accurate tracking and decision-making regarding pricing, budgeting, and performance evaluation.

Why Other Options Are Wrong:

a collection of costs to be assigned.

This option confuses the concept. A cost object is not a collection of costs but rather the target to which those costs are assigned. The wording reverses the relationship.

the tool used to charge cost dollars to user departments.

This refers more to cost allocation methods or systems. A cost object is not a tool—it’s the subject receiving the cost assignment, such as a product or department.

the primary function of a responsibility accounting system.

Responsibility accounting is about assigning costs to individuals or departments that control them. While it involves cost objects, this answer misrepresents the definition of a cost object itself.

a common cost.

A common cost is a cost shared across multiple cost objects and cannot be directly traced to any one of them. Therefore, this option is incorrect because it defines a type of cost, not a cost object.

Explanation:

A direct cost is one that can be specifically traced to a single cost object, such as a product, department, or unit. Copy paper purchased for a specific unit qualifies as a direct cost because the expense can be clearly attributed to that unit without allocation. This makes it distinct from shared or indirect costs that benefit multiple departments and require distribution.

Correct Answer:

copy paper for a specific unit

Why Other Options Are Wrong:

telephone costs for entire family

This is an indirect cost because it cannot be conveniently traced to one family member’s use. It benefits all members collectively and would require allocation to assign portions to individuals.

room use for a hospital event

This is an indirect cost because it supports a general activity and cannot be tied directly to a specific patient or product. It is more of an overhead-type expense than a direct cost.

housekeeping staff

The work of housekeeping staff benefits the entire facility rather than a specific cost object. Their wages are typically classified as indirect costs within overhead.

Explanation:

First, calculate the contribution margin per unit: $1,000 (selling price) – $500 (variable cost) = $500. Then, use the break-even formula in units: $1,000,000 ÷ $500 = 2,000 units. To get break-even revenue, multiply the units by the selling price: 2,000 × $1,000 = $2,000,000. This is the total sales revenue the company needs to earn to break even, covering both fixed and variable costs but earning no profit.

Correct Answer:

$2 million

Why Other Options Are Wrong:

$200,000

This is far too low and doesn’t account for the actual fixed cost of $1,000,000. Even at a full contribution margin of $500 per unit, $200,000 in sales would only cover 400 units—nowhere near break-even.

$1 million

This equals the fixed costs alone and ignores the need to sell enough units to recover variable costs as well. Break-even revenue must include both fixed and variable components, not just one.

$4 million

This overstates the break-even point. It assumes either too many units sold or a misapplied formula. Selling $4 million worth of product would produce a $1 million profit, not zero.

$2 million

This is the correct total sales revenue needed. It ensures that the contribution margin from each unit covers the fixed costs completely, resulting in a break-even with no profit or loss.