Principles of Financial and Managerial Accounting Exam (D196)

Explanation:

A $2,000 monthly software subscription is a fixed cost because it remains constant regardless of production levels or sales volume. Even if the company produces more or fewer goods, this subscription cost does not change. Fixed costs are predictable, recurring expenses essential for operations, unlike variable costs, which fluctuate with production, or mixed costs, which have both fixed and variable components.

Correct Answer:

Fixed cost

Why Other Options Are Wrong:

Variable cost: This is incorrect because variable costs change in direct proportion to production levels, such as raw materials or direct labor. The subscription is a fixed amount every month.

Mixed cost: Mixed costs include both fixed and variable components, like a phone bill with a base fee plus usage charges. The subscription does not vary based on usage, so it’s not mixed.

Direct cost: A direct cost is tied specifically to producing a product or service, like raw materials. The software subscription supports operations generally, not specific product outputs.

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.

Correct Answer:

How costs react to changes in production volume or business activities

Explanation:

Cost behavior describes how costs change in response to fluctuations in business activity. It categorizes costs as variable, fixed, or mixed, depending on how they respond when the level of production or service volume changes. Understanding cost behavior helps managers predict expenses, plan budgets, and make strategic decisions about scaling operations or managing resources.

Why Other Options Are Wrong:

Whether a cost is incurred in a manufacturing, merchandising, or service company

This describes the type of company, not the behavior of a cost. While cost structures may vary by industry, this option doesn’t explain how costs respond to changes in activity levels.

Classifying costs as either inventoriable or period costs

This is part of cost classification based on financial reporting, not behavior. Inventoriable costs are attached to products, while period costs are expensed in the period incurred. This doesn’t address how costs change with activity.

Whether a cost is classified as being direct or indirect

This classification relates to traceability, not behavior. It helps determine whether a cost can be tied directly to a product or department but doesn't indicate how it behaves with volume changes.

None of the above

This is incorrect because the first option clearly and accurately defines cost behavior.

Explanation:

In double-entry accounting, debits and credits do not universally mean increase or decrease but instead depend on the type of account. Assets and expenses increase with debits, while liabilities, revenues, and equity increase with credits. Contributed capital, retained earnings, and revenues are all equity-related accounts and therefore increase with credits. Expenses, on the other hand, represent outflows that reduce equity, and they are increased through debits. This makes expenses the correct answer.

Correct Answer:

expenses

Why Other Options Are Wrong:

contributed capital

This is part of the equity section of the balance sheet and increases with credits, not debits. A debit to contributed capital would reduce equity, which is the opposite of what the question is asking.

retained earnings

Retained earnings is also an equity account and grows with credits when the company earns profit. Debiting retained earnings decreases the account, usually when dividends are declared or losses occur. Therefore, it is not increased with a debit.

revenues

Revenues increase with credits, as they represent inflows that expand equity. Debiting revenues reduces them, such as when adjusting for returns or allowances. Thus, they are not increased with a debit.

Explanation:

Assets are resources owned by a company that provide future economic benefit. Cash, accounts receivable, and supplies are all examples of assets. Cash is the most liquid asset, accounts receivable represents amounts owed by customers, and supplies are current assets used in operations. Common stock, however, is not an asset; it is part of stockholders’ equity, representing the owners’ investment in the business.

Correct Answer:

Common Stock

Why Other Options Are Wrong:

Cash

Cash is the most liquid asset a company holds and is reported under current assets. It clearly provides future economic benefits by being available for immediate use in transactions. Therefore, it is an asset, not the exception.

Accounts Receivable

Accounts receivable represents money owed to the company by customers. It is considered an asset because it reflects future economic benefits in the form of cash collections. Since it increases the company’s resources, it is not the exception.

Supplies

Supplies are a current asset because they are resources expected to be used in the near term to support operations. They are not long-term assets but still provide measurable benefits to the company. Hence, they cannot be the correct choice.

Explanation:

Absorption costing, also known as full costing, requires that all manufacturing costs—direct materials, direct labor, variable overhead, and fixed overhead—be assigned to products. This approach ensures that each unit carries a share of all production costs, whether variable or fixed. It is the required method for external financial reporting under GAAP and IFRS.

Correct Answer:

A costing approach that encompasses all manufacturing costs, including direct materials, direct labor, and both fixed and variable overhead.

Why Other Options Are Wrong:

A method that only includes variable manufacturing costs

This describes variable costing, not absorption costing. Variable costing excludes fixed manufacturing overhead from product costs.

A technique that focuses solely on direct costs associated with production

This option ignores indirect costs like overhead, which absorption costing must include. Only considering direct costs does not meet the definition of absorption costing.

A system that allocates costs based on sales revenue

This does not reflect any recognized costing system. Absorption costing is based on production activity and manufacturing costs, not revenue allocation.

Explanation:

The relevant range refers to the level of activity within which cost behaviors — fixed and variable — remain predictable and constant. Within this range, total fixed costs stay constant, and variable costs per unit remain unchanged. However, once activity goes beyond this range, both fixed costs and variable costs may change due to capacity constraints, resource limits, or bulk discounts. Therefore, the statement claiming only variable costs change outside the relevant range is not correct because fixed costs can also adjust.

Correct Answer:

Outside of the relevant range, only variable costs can change.

Why Other Options Are Wrong:

Within a relevant range, total fixed costs and unit variable costs remain constant: This is correct because managerial accounting assumes fixed costs stay flat within a certain activity level, while variable costs per unit remain steady. Changing this assumption would distort cost-volume-profit analyses and decision-making.

Outside of the relevant range, both fixed and variable costs can change: This statement is accurate since significant increases or decreases in production can require added resources, causing fixed costs like rent, equipment, or salaries to shift along with variable costs.

Correct Answer:

Manufacturing overhead

Explanation:

Indirect materials are materials used in the production process but not easily traceable to a specific product. Examples include lubricants for machines or cleaning supplies used in the factory. These costs are necessary for manufacturing but are not directly tied to one unit of output. Because of their indirect nature, they are classified under manufacturing overhead, which includes all indirect production costs.

Why Other Options Are Wrong:

Direct materials

Direct materials are raw materials that can be directly traced to the production of specific finished goods, like wood used in furniture. Since indirect materials cannot be directly linked to a single product, they don’t fall under this category.

Direct labor

Direct labor refers to the wages of workers who are directly involved in the production of goods. Indirect materials, like cleaning solvents or lubricants, support production but are not labor, so this classification is incorrect.

Period costs

Period costs are non-manufacturing expenses like selling, general, and administrative costs that are expensed in the period incurred. Indirect materials are part of the production process, so they are product costs, not period costs.

Explanation:

Assets are resources owned by a business expected to provide future benefits. Petty cash, merchandise inventory, and cash all meet this definition because they represent resources available to the company. However, the cash over and short account is not an asset. Instead, it is an income statement account used to record small discrepancies in cash handling, and depending on the balance, it can be treated as a revenue or an expense item.

Correct Answer:

cash over and short

Why Other Options Are Wrong:

petty cash

Petty cash is a small amount of cash kept on hand for minor expenses, and it is considered a current asset.

merchandise inventory

Merchandise inventory represents goods available for sale, which provide future economic benefits. It is a current asset on the balance sheet.

cash

Cash is the most liquid asset and is classified as a current asset. It is universally recognized as an asset because it can be used to settle obligations or purchase resources.