Principles of Financial and Managerial Accounting Exam (D196)

Explanation:

Direct labor refers to the wages of workers who are directly involved in manufacturing a product. Their efforts can be specifically and easily traced to individual units of production. Examples include assembly line workers, machine operators, or carpenters in furniture production. These costs vary with production levels because they are tied to the actual manufacturing activity.

Correct Answer:

Labor costs that are easily traced to the production of specific goods

Why Other Options Are Wrong:

Labor costs that cannot be directly attributed to a specific product

This describes indirect labor, such as maintenance staff or supervisors, whose work supports production but cannot be traced to individual products.

Labor costs associated with administrative tasks

Administrative labor, like office staff or accountants, falls under period costs and is not considered direct labor because it is unrelated to physical production.

Labor costs that remain constant regardless of production levels

This describes fixed labor costs, such as salaried supervisors. Direct labor varies with production volume, so it is not constant.

Explanation:

Total manufacturing cost includes all expenses directly associated with producing goods: direct materials, direct labor, and manufacturing overhead. In this case, we calculate it as: $60,000 (materials) + $25,000 (labor) + $15,000 (overhead) = $100,000. This figure represents the full cost of production and is used in determining product pricing, evaluating profitability, and preparing cost accounting reports. Correctly summing these components ensures accurate financial planning and cost control.

Correct Answer:

$100,000

Why Other Options Are Wrong:

$70,000: This number likely comes from adding only direct labor and materials while ignoring overhead costs. Excluding overhead results in underestimating the true cost of manufacturing, which can lead to incorrect pricing and financial mismanagement.

$90,000: This figure suggests an error in calculation, possibly adding materials and labor with a reduced portion of overhead. Understating costs creates inaccurate profit projections and may cause financial planning issues, especially when setting selling prices.

$110,000: This amount overstates total manufacturing costs, likely by adding unnecessary expenses or double-counting a cost component. Overestimating production costs could cause managers to set prices too high, leading to decreased competitiveness and lower sales.

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:

Variable costs are expenses that change in direct proportion to activity levels, typically sales volume or production levels. For example, raw materials and direct labor costs rise as more units are produced and decrease if production declines. This relationship makes “with sales or production level” the most accurate description of variable costs.

Correct Answer:

With sales or production level

Why Other Options Are Wrong:

Over time

While costs may change over time due to inflation or market conditions, this is not what defines variable costs. Variable costs are tied specifically to changes in activity level, not simply the passage of time.

With usage level

This option seems close but is too vague. Costs related to usage (like utilities) can sometimes behave variably, but variable costs are specifically defined as changing with sales or production levels, not just general “usage.”

By location

Costs may differ by geographic location due to rent or wage differences, but that does not define variable costs. Location affects cost structure but is not the principle behind variable cost behavior.

Explanation:

Managerial accounting and financial accounting differ mainly in audience and purpose. Managerial accounting is designed to aid managers in decision-making, planning, and controlling operations. It provides detailed, often forward-looking information to help with budgeting, forecasting, and efficiency improvements, and it is not constrained by standardized reporting rules. In contrast, financial accounting is focused on producing standardized reports like income statements and balance sheets for external users such as investors, creditors, and regulators. These reports are summarized, follow strict accounting standards, and emphasize the financial position and performance of the company as a whole. Because of this, the best description is that managerial accounting provides detailed information for internal use, while financial accounting provides summarized information for external stakeholders.

Correct Answer:

Managerial accounting provides detailed information for internal use; financial accounting provides summarized information for external stakeholders.

Why Other Options Are Wrong:

Managerial accounting emphasizes historical data; financial accounting emphasizes future projections.

This option incorrectly reverses the focus of each type of accounting. Managerial accounting often incorporates forecasts, budgets, and projections, so it is future-oriented. Financial accounting, on the other hand, is heavily based on historical data because it reports past transactions and performance. Therefore, this option misstates the fundamental difference.

Managerial accounting is concerned with compliance; financial accounting is concerned with performance evaluation.

This option is misleading because compliance is primarily the concern of financial accounting, which must adhere to standards like GAAP or IFRS to ensure consistency and comparability for external stakeholders. Managerial accounting is not bound by these rules and focuses instead on providing useful information for managerial decision-making. Performance evaluation is part of both, but this statement confuses their primary purposes.

Managerial accounting is primarily used for tax purposes; financial accounting is primarily used for investment analysis.

This option is incorrect because tax purposes fall under tax accounting, which is a separate discipline. Managerial accounting is not designed to prepare tax filings but to assist managers internally. Financial accounting does serve investment analysis, but its role extends beyond that to provide information for a variety of external users, including regulators and creditors. Thus, this option oversimplifies and misstates their functions.

Correct Answer:

$13.00

Explanation:

The contribution margin ratio (CMR) = Contribution Margin ÷ Sales = 35%.

Contribution Margin = Sales × CMR = $200,000 × 0.35 = $70,000.

Since Contribution Margin = Sales – Variable Costs, then Variable Costs = $200,000 − $70,000 = $130,000.

Variable cost per unit = Total Variable Costs ÷ Units Sold = $130,000 ÷ 10,000 = $13.00.

Why Other Options Are Wrong:

$20.00 – This incorrectly assumes variable costs equal sales minus profit without considering the contribution margin.

$7.00 – This underestimates the variable cost per unit by assuming a higher contribution margin than stated.

$3.00 – This assumes almost no variable cost, which conflicts with the given 35% CMR.

Explanation:

In process costing, the assumption is that all units produced by a processing department are homogeneous, meaning they are identical or very similar. This is because production occurs in a continuous flow, such as in industries like chemicals, beverages, or textiles. The costs are spread evenly across all units, reflecting their uniformity.

Correct Answer:

homogeneous

Why Other Options Are Wrong:

unique

Unique units are associated with job-order costing, where each job or product is distinct and costs are tracked individually.

heterogeneous

Heterogeneous means varied or diverse. Process costing assumes uniform products, so heterogeneous is the opposite of what applies.

Explanation:

Contribution margin is calculated as revenue minus variable costs. The revenues are $2,500,000. Variable costs are given as 8% of revenue, which is 0.08 × $2,500,000 = $200,000. Subtracting variable costs from revenue, the contribution margin is $2,500,000 – $2,200,000 = $175,000. The mention of construction costs being 85% of revenue is related to total costs but does not alter the contribution margin calculation since contribution margin focuses solely on revenue and variable costs. Therefore, the correct contribution margin is $175,000.

Correct Answer:

$175,000

Why Other Options Are Wrong:

$150,000

This option is incorrect because it does not match the correct subtraction of variable costs from revenue. Arriving at $150,000 would involve miscalculating the 8% of revenue or mistakenly subtracting additional expenses beyond the variable costs. Since contribution margin is strictly revenue minus variable costs, this figure is too low.

$80,000

This amount is far below the actual contribution margin. It could result from double-counting construction costs and variable costs or applying percentages incorrectly. Contribution margin is not intended to measure net profit but the amount available to cover fixed costs and generate profit, so $80,000 understates the correct result.

$275,000

This figure is too high compared to the actual contribution margin. It likely comes from subtracting a lower incorrect variable cost figure or confusing the role of construction costs with variable costs. Since the correct variable cost is $200,000, the contribution margin cannot be as large as $275,000.

Explanation:

Cost behavior specifically describes how costs respond to changes in the level of business activity. This includes whether costs remain fixed, vary directly with activity, or have mixed characteristics. For example, rent remains constant regardless of sales volume, while raw materials increase as production increases. Managers use this understanding to plan, budget, and make decisions. Cost behavior does not address accounting rules about accruing or expensing costs; rather, it focuses solely on how costs behave in relation to activity levels.

Correct Answer:

the way in which total costs change in response to changes in the level of activity.

Why Other Options Are Wrong:

the method used to determine whether a cost is accrued or expensed

This relates to accounting treatment under accrual versus cash basis accounting, not to cost behavior. Cost behavior does not involve when costs are recognized in the financial statements but instead how they fluctuate with activity. Therefore, this option confuses cost behavior with accounting rules.

both the way in which total costs change in response to changes in the level of activity and the method used to determine whether a cost is accrued or expensed

This option is incorrect because it incorrectly combines cost behavior with accounting treatment. Cost behavior deals only with changes in cost relative to activity levels, not with whether costs are accrued or expensed. Including both concepts makes this choice inaccurate.

neither the way in which total costs change in response to changes in the level of activity or the method used to determine whether a cost is accrued or expensed

This option dismisses the very definition of cost behavior. Since cost behavior is specifically about how costs change with activity levels, choosing “neither” would ignore the actual meaning of the term. Thus, this option is wrong.