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Improving Profits (Practice Quiz)

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Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

If you have difficulty answering the following questions, learn more about this topic by reading our Improving Profits (Explanation).


1.
Fixed expenses are best described as expenses that remain the same __________.

in total even when volume triples

Wrong.
This is NOT the best answer. Fixed expenses are assumed to be the same in total only in a reasonable range of volume. The tripling of volume is more than a reasonable change. If volume did triple, it is likely that the company would have to add more space and more salaried employees. This would mean more fixed expenses.

in total within a reasonable change in volume

Right!

on a per unit basis as volume changes

Wrong.
2.
Variable expenses are best described as expenses that change __________.

in total as volume changes

Right!
Variable expenses change in total as volume changes. They are fixed on a per unit basis. For example, the cost of the flour in a loaf of bread is a variable expense for the bakery. The cost of flour will be higher in total as more loaves of bread are produced. The cost of flour is probably constant on a per unit basis.

on a per unit basis as volume changes

Wrong.
Variable expenses do not change on a per unit basis. They increase in total as more units are produced. For example, let's assume that a bakery puts one pound of flour into each loaf of its bread. The bakery pays 20 cents per pound for flour. If the bakery makes and sells 100 loaves, it will have flour of $20 in the 100 loaves. If the bakery makes and sells 250 loaves, it will have flour of $50 in the 250 loaves.
3.
Expenses that will be the same amount under two alternative proposals are not relevant when selecting one of the proposals. In other words, the expenses that are the same could be omitted from both alternatives without affecting the decision.

True

Right!
For example, a company is faced with the decision to continue to serve customers in three states or to expand so that its service area will be four states. It is agreed that the senior executives will not receive any additional compensation if the fourth state is added. Therefore, the total compensation of the senior executives is NOT relevant to the decision. The actual senior executive compensation amount (regardless of amount) will be the same amount whether the company stays in three states or expands to the fourth state. What matters are the ADDITIONAL expenses and the ADDITIONAL revenues.

False

Wrong.
See the discussion under True.
4.
A general rule for profit maximization in the short run is: if the additional revenues exceed the additional expenses...do it.

True

Right!
The company will have more profit if a decision results in more additional revenues than additional expenses.

False

Wrong.
It is true that if the additional revenues exceed the additional expenses, the company's profit will increase.
5.
The most relevant amounts for making a decision are found in the general ledger.

True

Wrong.
The amounts in the general ledger are past, historical amounts. Relevant amounts for a decision are the present and future amounts. You could start with the general ledger amounts, but they need to be adjusted to the present and future.

False

Right!
The amounts in the general ledger are past, historical amounts.
6.
If a company's sales were to triple, some fixed expenses are likely to increase.

True

Right!
Expenses remain fixed in a reasonable range of sales or other activity. A 200% increase in activity is so significant that even fixed costs will likely change. For example, you may need to add another supervisor, another manager, and to expand the warehouse.

False

Wrong.
Expenses remain fixed in a reasonable range of sales or other activity. A 200% increase in activity is so significant that even fixed costs will likely change. For example, you may need to add another supervisor, another manager, and to expand the warehouse.
7.
A sole proprietor's compensation will be included in the income statement account Salaries Expense.

True

Wrong.
A sole proprietor's compensation will not be included in Salaries Expense. Any amounts withdrawn from the company for the proprietor's personal use are debited to the proprietor's drawing account. The drawing account is a contra owner's equity account.

False

Right!
The sole proprietor does not receive a salary. Rather, any amounts withdrawn from the company for the proprietor's personal use are debited to the proprietor's drawing account. The drawing account is a contra owner's equity account.
8.
The original cost of an asset presently in use is generally not relevant in the decision to replace the asset.

True

Right!
The original cost is a sunk, past cost.

False

Wrong.
The original cost is a sunk, past cost. Such costs are not relevant to any decision, since decisions involve the present and the future.
9.
A significant amount of money to be received from the sale of equipment being replaced is relevant in the decision to replace the equipment.

True

Right!
The money received from the sale of the equipment is in the present or future and as such is relevant to the decision.

False

Wrong.
The money received from the sale of the equipment is in the present or future and as such is relevant to the decision.
10.
A variable expense means that the per unit amount will vary with sales.

True

Wrong.
A variable expense varies in total as sales vary. It is constant on a per unit basis. For example, if a company pays a $3 commission on each item sold, the $3 per unit is constant and the total commission will vary as sales vary. If 100 items are sold, the total variable expense will be $300. If 200 items are sold, the total variable expense will be $600.

False

Right!
The variable expense per unit stays constant. If the variable expense is $3 per unit, the $3 per unit does not change.
11.
Which costs are the most relevant in deciding between two alternatives?

Future costs that differ

Right!

Future costs that do not differ

Wrong.
Future costs and expenses that do NOT differ are irrelevant in a decision.

Historical costs

Wrong.
Historical costs are past costs. Since no decision can affect the past, historical costs are not relevant to a decision.
12.
Past, historical costs are also known as __________ sunk costs.
13.
Expenses that are part fixed and part variable are known as __________ mixed or semivariable costs.
14.
The statistical tool used to determine the fixed and variable portions of a mixed expense is __________ regression (or least-squares method) analysis.
15.
The salary of the vice-president of human resources is likely to be classified into which cost behavior?

Fixed

Right!
The salary of the vice-president of human resources is not likely to change within a reasonable range of sales or other activity.

Variable

Wrong.
The salary of the vice-president of human resources is not likely to change within a reasonable range of sales or other activity.

Mixed

Wrong.
The salary of the vice-president of human resources is not likely to change within a reasonable range of sales or other activity.
16.
The office rent is likely to be classified into which cost behavior?

Fixed

Right!
The office rent is not likely to change within a reasonable range of sales or other activity.

Variable

Wrong.
The office rent is not likely to change within a reasonable range of sales or other activity.

Mixed

Wrong.
The office rent is not likely to change within a reasonable range of sales or other activity.
17.
Commissions Expense is likely to be classified into which cost behavior?

Fixed

Wrong.
Sales commissions expense is a variable expense, because the total amount of sales commissions will increase in proportion to the increase in sales and it will decrease in total as sales decrease.

Variable

Right!
Sales commissions expense is a variable expense, because the total amount of sales commissions will increase in proportion to the increase in sales and it will decrease in total as sales decrease.

Mixed

Wrong.
Sales commissions expense is a variable expense, because the total amount of sales commissions will increase in proportion to the increase in sales and it will decrease in total as sales decrease.
18.
The expense of operating the shipping department is likely to follow which cost behavior?

Fixed

Wrong.
The shipping department will likely have some expenses that are fixed (depreciation of equipment, salary of supervisor, heat, etc.) and some expenses that are variable (electricity for equipment used, some hourly-paid employees, shipping boxes, labels, etc.)

Variable

Wrong.
The shipping department will likely have some expenses that are fixed (depreciation of equipment, salary of supervisor, heat, etc.) and some expenses that are variable (electricity for equipment used, some hourly-paid employees, shipping boxes, labels, etc.)

Mixed

Right!
The shipping department will likely have some expenses that are fixed (depreciation of equipment, salary of supervisor, heat, etc.) and some expenses that are variable (electricity for equipment used, some hourly-paid employees, shipping boxes, labels, etc.)
19.
The property tax on the administrative office building is likely to follow which cost behavior?

Fixed

Right!
The property tax on the office building will not change because of a reasonable change is sales volume or other activity.

Variable

Wrong.
The property tax on the office building will not change because of a reasonable change is sales volume or other activity.

Mixed

Wrong.
The property tax on the office building will not change because of a reasonable change is sales volume or other activity.
20.
A retailer's cost of goods sold is likely to behave as which type of cost?

Fixed

Wrong.
A retailer's cost of goods sold will increase in total as sales increase and it will decrease in total as sales decrease.

Variable

Right!
A retailer's cost of goods sold will increase in total as sales increase and it will decrease in total as sales decrease.

Mixed

Wrong.
A retailer's cost of goods sold will increase in total as sales increase and it will decrease in total as sales decrease.
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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