Question 1

The following costs are all examples of committed fixed costs: depreciation on buildings, salaries of highly trained engineers, real estate taxes, and insurance expenses.

Accepted Answer

Committed fixed costs are costs that do not change with the level of production or sales and are difficult to adjust in the short term. Depreciation on buildings, salaries of highly trained engineers, real estate taxes, and insurance expenses are all examples of committed fixed costs.

Question 2

A variable cost remains constant if expressed on a unit basis.

Accepted Answer

Variable costs per unit remain constant even as the total volume of production or activity changes.

Question 3

Traditional format income statements are widely used for preparing external financial statements.

Accepted Answer

Traditional format income statements are commonly used for external financial reporting to provide a clear and concise presentation of a company's revenues, expenses, and net income.

Question 4

In a contribution format income statement for a merchandising company, the cost of goods sold reports the product costs attached to the merchandise sold during the period.

Accepted Answer

The answer of In a contribution format income statement for...

Question 5

Although the traditional format income statement is useful for external reporting purposes, it has serious limitations when used for internal purposes because it does not distinguish between fixed and variable costs.

Accepted Answer

The traditional format income statement combines all costs into one category, making it difficult for managers to distinguish between fixed and variable costs. This distinction is essential for internal decision-making purposes such as cost-volume-profit analysis and break-even analysis.

Question 6

The contribution format income statement is used as an internal planning and decision-making tool. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.

Accepted Answer

The statement is true. The contribution format income statement focuses on separating costs into fixed and variable components and is useful for analyzing how changes in sales volume will impact profit margins. It is used internally by management for making decisions about pricing, product mix, and other strategic considerations.

Question 7

The amount that a manufacturing company could earn by renting unused portions of its warehouse is an example of an opportunity cost.

Accepted Answer

Opportunity cost refers to the cost of the best alternative forgone when making a decision. In this case, the manufacturing company could earn money by renting out unused portions of its warehouse, but choosing not to do so means giving up that potential income, which is an example of opportunity cost.

Question 8

A contribution format income statement separates costs into fixed and variable categories, first deducting variable expenses from sales to obtain the contribution margin.

Accepted Answer

The statement correctly describes the structure and purpose of a contribution format income statement, where variable costs are deducted from sales to obtain the contribution margin before deducting fixed costs to determine the net income.

Question 9

Contribution margin and gross margin mean the same thing.

Accepted Answer

Contribution margin is the difference between sales revenue and all variable costs, while gross margin is the difference between sales revenue and the cost of goods sold (only includes variable costs related to production). Therefore, they are not the same thing.

Question 10

In a traditional format income statement, the gross margin is sales minus cost of goods sold.

Accepted Answer

In a traditional income statement, the gross margin is calculated by subtracting the cost of goods sold from the total sales.

Question 11

A fixed cost is not constant per unit of product.

Accepted Answer

Fixed costs remain constant in total regardless of changes in the level of production, but on a per-unit basis, they decrease as production volume increases.

Question 12

The relevant range concept is applicable to mixed costs.

Accepted Answer

The relevant range concept is particularly relevant to mixed costs, which contain both variable and fixed components. The relevant range represents the level of activity over which cost behavior patterns are expected to remain the same, and outside of this range, the behavior may change due to capacity constraints or shifts in cost structure.

Question 13

Differential costs can only be variable.

Accepted Answer

Differential costs can be either variable or fixed. The term "differential cost" refers to the difference in cost between two options or alternatives. This difference in cost can arise from both variable and fixed costs.

Question 14

Committed fixed costs represent organizational investments with a one-year planning horizon.

Accepted Answer

Committed fixed costs represent long-term investments that cannot be easily changed within a one-year planning horizon. They are not limited to a one-year planning horizon.

Question 15

In a traditional format income statement for a merchandising company, cost of goods sold is a variable cost that is included in the "Variable expenses" portion of the income statement.

Accepted Answer

Cost of goods sold is a major expense item in a merchandising company's income statement, but it is not considered a variable expense. It is a direct cost specifically related to the products that were sold during the period, and is usually listed as a separate expense item before the section for variable expenses.

Question 16

Contribution format income statements are prepared primarily for external reporting purposes.

Accepted Answer

Contribution format income statements are primarily used internally by management for decision making, planning, and controlling operations, not for external reporting.

Question 17

Most companies use the contribution approach in preparing financial statements for external reporting purposes.

Accepted Answer

Most companies use the absorption approach in preparing financial statements for external reporting purposes, which assigns all costs (including fixed costs) to the products or services being sold. The contribution approach is primarily used for internal decision-making purposes.

Question 18

The potential benefit that is given up when one alternative is selected over another is called a sunk cost.

Accepted Answer

The definition given in this statement is incorrect. The potential benefit given up when one alternative is selected over another is actually called an opportunity cost. A sunk cost refers to a cost that has already been incurred and cannot be recovered, regardless of the decision made.

Question 19

A cost that differs from one month to another is known as a sunk cost.

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. It is not dependent on changes in time, and therefore does not differ from one month to another.

Question 20

In a traditional format income statement, the gross margin minus selling and administrative expenses equals net operating income.

Accepted Answer

This statement is true. The calculation for net operating income is gross margin - selling and administrative expenses.

Quiz 1: Managerial Accounting and Cost Concepts