Principles of Financial and Managerial Accounting Exam (D196)

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.

Explanation:

Manufacturing overhead includes all indirect costs related to production that cannot be conveniently traced to a specific product. Examples include indirect materials, factory maintenance, depreciation, insurance, taxes, and rent on the production facility. However, utilities used in administrative offices are not part of the manufacturing process. They fall under administrative expenses, which are treated as period costs, not manufacturing overhead.

Correct Answer:

Utilities used in administrative offices

Why Other Options Are Wrong:

Indirect materials

These are supplies like glue, screws, or cleaning agents used in production but not easily traceable to a single unit. They are part of manufacturing overhead because they support production.

Maintenance cost for production

Maintenance is necessary to keep factory equipment and facilities running. Since it supports manufacturing but cannot be traced to specific units, it is considered part of manufacturing overhead.

Taxes, Insurance, and Rent used in factory

These costs are tied to the factory building and equipment, making them indirect production costs. They are included in manufacturing overhead.

Correct Answer:

Cover fixed costs and contribute to profit

Explanation:

The contribution margin represents the amount remaining from sales revenue after variable costs have been deducted. This remaining amount is used to first cover fixed costs, and once those are covered, any excess becomes profit. In cost-volume-profit (CVP) analysis, understanding the contribution margin helps managers assess how many units need to be sold to break even or reach a target profit.

Why Other Options Are Wrong:

Determine the total fixed costs

Fixed costs are determined independently of the contribution margin. The contribution margin helps cover fixed costs, but it does not determine their total amount.

Calculate the gross profit

Gross profit includes cost of goods sold (COGS), which may include fixed manufacturing costs. Contribution margin only considers variable costs, making it different from gross profit.

Analyze the variable costs per unit

While the contribution margin relies on variable cost data, it is not used to analyze variable costs per unit. Instead, it shows how much revenue remains after variable costs have been paid.

Explanation:

Direct costs are those that can be specifically traced to the production of a product. The materials used in production are directly consumed in creating the product and are easily assignable to each unit manufactured. Utilities, administrative salaries, and depreciation on factory equipment are all indirect costs, as they support the production process but cannot be traced directly to a single product without allocation.

Correct Answer:

Materials used in production

Why Other Options Are Wrong:

Utilities for the factory

Utilities such as electricity or water are necessary for production but cannot be directly tied to a specific product unit. They are considered indirect manufacturing overhead rather than direct costs.

Salaries of administrative staff

Administrative staff are not directly involved in production. Their costs are classified as period costs, not product costs, because they support the business as a whole rather than being tied to units produced.

Depreciation on factory equipment

While depreciation on production equipment is a manufacturing cost, it is considered indirect because it applies broadly to the operation of the factory rather than to specific units. It must be allocated across products as overhead.

Explanation:

In process costing, activities in a processing department are applied uniformly to all units passing through that department. This is because products are generally mass-produced, and each unit receives the same type and amount of processing. The system is designed for industries like chemicals, food, or textiles, where identical units are produced in continuous flows.

Correct Answer:

uniformly on all units

Why Other Options Are Wrong:

specifically, to each unit

This applies more to job-order costing, where costs are assigned to individual, unique jobs or products. In process costing, units are not worked on individually but as part of a continuous process.

in small batches

Batch processing relates to some production systems but is not the defining feature of process costing. Costs are accumulated for departments, not small batches.

to differentiate units of product

Process costing assumes units are homogeneous, not differentiated. The goal is uniformity, not uniqueness.

Explanation:

Managerial accounting focuses on internal users—specifically managers—by providing detailed and timely information to assist in running the business effectively. Its primary goals are planning (setting goals and creating budgets), control (monitoring operations to ensure they align with plans), and decision making (using data to choose among alternatives). Financial reporting and preparing reports for external users fall under financial accounting, not managerial accounting.

Correct Answer:

planning, control, and decision making.

Why Other Options Are Wrong:

planning, control, and financial reporting.

This option is partly correct because managerial accounting does support planning and control, but financial reporting is an external function tied to financial accounting, not managerial accounting. Therefore, it mixes internal and external focuses incorrectly.

control, evaluation, and financial reporting.

Managerial accounting does include control and performance evaluation, but the emphasis on financial reporting makes this option inaccurate. Financial reporting belongs to financial accounting, not managerial accounting.

preparing reports for external users.

This is the main role of financial accounting, which prepares standardized financial statements for investors, creditors, and regulators. Managerial accounting serves internal users, so this option is incorrect.

Explanation:

Direct materials are raw inputs that can be physically and conveniently traced to the finished product. They are essential components of the product and directly become part of the final good. For example, wood in furniture manufacturing or fabric in clothing production are considered direct materials because they can be clearly identified in each unit of the finished product. This traceability is what differentiates direct materials from indirect materials or general overhead.

Correct Answer:

Materials that are essential to the product and can be easily identified

Why Other Options Are Wrong:

Costs that cannot be traced to a specific product

This describes indirect costs, such as utilities or maintenance, which cannot be conveniently linked to one product. Direct materials must be traceable to specific output.

General expenses related to manufacturing operations

General expenses, such as factory utilities or depreciation on equipment, fall under manufacturing overhead, not direct materials. These costs support production but do not become part of the final product.

Costs associated with indirect labor and overhead

Indirect labor and overhead are also indirect costs, not direct materials. They contribute to the production process but are not physically traceable to the product.

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:

To calculate the contribution margin per unit, divide the total contribution margin by the number of units sold. In this case, $200,000 divided by 10,000 units equals $20.00 per unit. This means each unit sold contributes $20.00 toward covering fixed costs and profit. This figure is important for decision-making in pricing, sales targets, and profitability analysis.

Correct Answer:

$20.00

Why Other Options Are Wrong:

$0.05

This value is far too low to result from dividing $200,000 by 10,000 units. It suggests a fundamental miscalculation, possibly confusing dollars with percentages or using an inverted formula.

$2.00

This answer underestimates the per-unit contribution margin by a factor of 10. It may result from incorrect division or misunderstanding the total contribution margin concept.

$5.00

This is also too low and indicates a miscalculation. It would mean the total contribution margin was only $50,000, which contradicts the given figure of $200,000. Misusing the formula results in this incorrect number.