OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
Multiple Choice
1. LO 2.1 Which of the following is the primary source of revenue for a service business?
A. the production of products from raw materials
B. the purchase and resale of finished products
C. providing intangible goods and services
D. the sale of raw materials to manufacturing firms
Solution
C
2. LO 2.1 Which of the following is the primary source of revenue for a merchandising
business?
A. the production of products from raw materials
B. the purchase and resale of finished products
C. the provision of intangible goods and services
D. the sale of raw materials to manufacturing firms
Solution
B
3. LO 2.1 Which of the following is the primary source of revenue for a manufacturing business?
A. the production of products from raw materials
B. the purchase and resale of finished products
C. the provision of intangible goods and services
D. both the provision of services and the sale of finished goods
Solution
A
4. LO 2.1 Which of the following represents the components of the income statement for a
service business?
A. Sales Revenue – Cost of Goods Sold = gross profit
B. Service Revenue – Operating Expenses = operating income
C. Sales Revenue – Cost of Goods Manufactured = gross profit
D. Service Revenue – Cost of Goods Purchased = gross profit
Solution
B
5. LO 2.1 Which of the following represents the components of the income statement for a
manufacturing business?
A. Sales Revenue – Cost of Goods Sold = gross profit
B. Service Revenue – Operating Expenses = gross profit
C. Service Revenue – Cost of Goods Manufactured = gross profit
D. Sales Revenue – Cost of Goods Manufactured = gross
Solution
A
6. LO 2.1 Which of the following represents the components of the income statement for a
merchandising business?
A. Sales Revenue – Cost of Goods Sold = gross profit
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
B. Service Revenue – Operating Expenses = gross profit
C. Sales Revenue – Cost of Goods Manufactured = gross profit
D. Service Revenue – Cost of Goods Purchased = gross profit
Solution
A
7. LO 2.2 Conversion costs include all of the following except:
A. wages of production workers
B. depreciation on factory equipment
C. factory utilities
D. direct materials purchased
Solution
D
8. LO 2.2 Which of the following is not considered a product cost?
A. direct materials
B. direct labor
C. indirect materials
D. selling expense
Solution
D
9. LO 2.2 Fixed costs are expenses that ________.
A. vary in response to changes in activity level
B. remain constant on a per-unit basis
C. increase on a per-unit basis as activity increases
D. remain constant as activity changes
Solution
D
10. LO 2.2 Variable costs are expenses that ________.
A. remain constant on a per-unit basis but change in total based on activity level
B. remain constant on a per-unit basis and remain constant in total regardless of activity
level
C. decrease on a per-unit basis as activity level increases
D. remain constant in total regardless of activity level within a relevant range
Solution
A
11. LO 2.2 Total costs for ABC Distributing are $250,000 when the activity level is 10,000
units. If variable costs are $5 per unit, what are their fixed costs?
A. $240,000
B. $200,000
C. $260,000
D. Their fixed costs cannot be determined from the information presented.
Solution
B
12. LO 2.2 Which of the following would not be classified as manufacturing overhead?
A. indirect materials
B. indirect labor
C. direct labor
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
D. property taxes on factory
Solution
C
13. LO 2.2 Which of the following are prime costs?
A. indirect materials, indirect labor, and direct labor
B. direct labor, indirect materials, and indirect labor
C. direct labor and indirect labor
D. direct labor and direct materials
Solution
D
14. LO 2.2 Which of the following statements is true regarding average fixed costs?
A. Average fixed costs per unit remain fixed regardless of level of activity.
B. Average fixed costs per unit rise as the level of activity rises.
C. Average fixed costs per unit fall as the level of activity rises.
D. Average fixed costs per unit cannot be determined.
Solution
C
15. LO 2.3 The high-low method and least-squares regression are used by managers to
________.
A. decide whether to make or buy a component part
B. minimize corporate tax liability
C. maximize output
D. estimate costs
Solution
D
16. LO 2.3 Which of the following methods of cost estimation relies on only two data points?
A. the high-low method
B. account analysis
C. least-squares regression
D. SWOT analysis
Solution
A
17. LO 2.3 In the cost equation Y = a + bx, Y represents which of the following?
A. fixed costs
B. variable costs
C. total costs
D. units of production
Solution
C
18. LO 2.3 A scatter graph is used to test the assumption that the relationship between cost and
activity level is ________.
A. curvilinear
B. cyclical
C. unpredictable
D. linear
Solution
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, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
D
Questions
1. LO 2.1 Identify the three primary classifications of businesses and explain the differences
among the three.
Solution
Answers will vary but should include merchandising, service, and manufacturing businesses.
Answers should also distinguish how each firm accounts for their costs on the income statement.
2. LO 2.1 Explain how the income statement of a manufacturing company differs from the
income statement of a merchandising company.
Solution
Answers will vary. Responses should include a differentiation between merchandisers
purchasing products for resale and manufacturers producing the products that they sell. Also,
manufacturers have costs of goods manufactured statements incorporated into their cost of goods
sold.
3. LO 2.1 Walsh & Coggins, a professional accounting firm, collects cost information about the
services they provide to their clients. Describe the types of cost data they would collect and
explain the importance of analyzing this cost data.
Solution
Answers will vary but should include a discussion of operating costs such as salaries and wages,
advertising, rent, and office expenses. Responses should also include a discussion of the
usefulness of such cost data to analyze the firm’s profitability and pricing of services.
4. LO 2.1 Lizzy’s is a retail clothing store, specializing in formal wear for weddings. They
purchase their clothing for resale from specialty distributors and manufacturers. Recently the
owners of Lizzy’s have noted an increased interest in costume jewelry and fashion accessories
among their clientele. If the owners of Lizzy’s decide to expand their business to include these
products, what cost data would they need to collect and analyze prior to expanding the business?
Solution
Answers will vary. Responses should include a discussion of product costs as well as operating
costs, such as increases in wages, retail space, and advertising. Responses also should include a
discussion of the usefulness of such cost data to analyze the potential profitability and pricing of
the new merchandise.
5. LO 2.2 Identify and describe the three types of product costs in a manufacturing firm.
Solution
Answers will vary but must include direct materials, direct labor, and manufacturing overhead.
6. LO 2.2 Explain the difference between a period cost and a product cost.
Solution
Answers will vary. Responses should include that product costs are all costs associated with the
acquisition or production of goods and products and that period costs are composed of all costs
that are not product costs.
7. LO 2.2 Explain the concept of relevant range and how it affects total fixed costs.
Solution
Answers will vary but should include that fixed costs remain fixed in total across the relevant
range, bounded by a minimum and maximum activity level. Once the maximum activity level in
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Chapter 2: Building Blocks of Managerial Accounting
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
Multiple Choice
1. LO 2.1 Which of the following is the primary source of revenue for a service business?
A. the production of products from raw materials
B. the purchase and resale of finished products
C. providing intangible goods and services
D. the sale of raw materials to manufacturing firms
Solution
C
2. LO 2.1 Which of the following is the primary source of revenue for a merchandising
business?
A. the production of products from raw materials
B. the purchase and resale of finished products
C. the provision of intangible goods and services
D. the sale of raw materials to manufacturing firms
Solution
B
3. LO 2.1 Which of the following is the primary source of revenue for a manufacturing business?
A. the production of products from raw materials
B. the purchase and resale of finished products
C. the provision of intangible goods and services
D. both the provision of services and the sale of finished goods
Solution
A
4. LO 2.1 Which of the following represents the components of the income statement for a
service business?
A. Sales Revenue – Cost of Goods Sold = gross profit
B. Service Revenue – Operating Expenses = operating income
C. Sales Revenue – Cost of Goods Manufactured = gross profit
D. Service Revenue – Cost of Goods Purchased = gross profit
Solution
B
5. LO 2.1 Which of the following represents the components of the income statement for a
manufacturing business?
A. Sales Revenue – Cost of Goods Sold = gross profit
B. Service Revenue – Operating Expenses = gross profit
C. Service Revenue – Cost of Goods Manufactured = gross profit
D. Sales Revenue – Cost of Goods Manufactured = gross
Solution
A
6. LO 2.1 Which of the following represents the components of the income statement for a
merchandising business?
A. Sales Revenue – Cost of Goods Sold = gross profit
Page 1 of 31
,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
B. Service Revenue – Operating Expenses = gross profit
C. Sales Revenue – Cost of Goods Manufactured = gross profit
D. Service Revenue – Cost of Goods Purchased = gross profit
Solution
A
7. LO 2.2 Conversion costs include all of the following except:
A. wages of production workers
B. depreciation on factory equipment
C. factory utilities
D. direct materials purchased
Solution
D
8. LO 2.2 Which of the following is not considered a product cost?
A. direct materials
B. direct labor
C. indirect materials
D. selling expense
Solution
D
9. LO 2.2 Fixed costs are expenses that ________.
A. vary in response to changes in activity level
B. remain constant on a per-unit basis
C. increase on a per-unit basis as activity increases
D. remain constant as activity changes
Solution
D
10. LO 2.2 Variable costs are expenses that ________.
A. remain constant on a per-unit basis but change in total based on activity level
B. remain constant on a per-unit basis and remain constant in total regardless of activity
level
C. decrease on a per-unit basis as activity level increases
D. remain constant in total regardless of activity level within a relevant range
Solution
A
11. LO 2.2 Total costs for ABC Distributing are $250,000 when the activity level is 10,000
units. If variable costs are $5 per unit, what are their fixed costs?
A. $240,000
B. $200,000
C. $260,000
D. Their fixed costs cannot be determined from the information presented.
Solution
B
12. LO 2.2 Which of the following would not be classified as manufacturing overhead?
A. indirect materials
B. indirect labor
C. direct labor
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
D. property taxes on factory
Solution
C
13. LO 2.2 Which of the following are prime costs?
A. indirect materials, indirect labor, and direct labor
B. direct labor, indirect materials, and indirect labor
C. direct labor and indirect labor
D. direct labor and direct materials
Solution
D
14. LO 2.2 Which of the following statements is true regarding average fixed costs?
A. Average fixed costs per unit remain fixed regardless of level of activity.
B. Average fixed costs per unit rise as the level of activity rises.
C. Average fixed costs per unit fall as the level of activity rises.
D. Average fixed costs per unit cannot be determined.
Solution
C
15. LO 2.3 The high-low method and least-squares regression are used by managers to
________.
A. decide whether to make or buy a component part
B. minimize corporate tax liability
C. maximize output
D. estimate costs
Solution
D
16. LO 2.3 Which of the following methods of cost estimation relies on only two data points?
A. the high-low method
B. account analysis
C. least-squares regression
D. SWOT analysis
Solution
A
17. LO 2.3 In the cost equation Y = a + bx, Y represents which of the following?
A. fixed costs
B. variable costs
C. total costs
D. units of production
Solution
C
18. LO 2.3 A scatter graph is used to test the assumption that the relationship between cost and
activity level is ________.
A. curvilinear
B. cyclical
C. unpredictable
D. linear
Solution
Page 3 of 31
, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 2: Building Blocks of Managerial Accounting
D
Questions
1. LO 2.1 Identify the three primary classifications of businesses and explain the differences
among the three.
Solution
Answers will vary but should include merchandising, service, and manufacturing businesses.
Answers should also distinguish how each firm accounts for their costs on the income statement.
2. LO 2.1 Explain how the income statement of a manufacturing company differs from the
income statement of a merchandising company.
Solution
Answers will vary. Responses should include a differentiation between merchandisers
purchasing products for resale and manufacturers producing the products that they sell. Also,
manufacturers have costs of goods manufactured statements incorporated into their cost of goods
sold.
3. LO 2.1 Walsh & Coggins, a professional accounting firm, collects cost information about the
services they provide to their clients. Describe the types of cost data they would collect and
explain the importance of analyzing this cost data.
Solution
Answers will vary but should include a discussion of operating costs such as salaries and wages,
advertising, rent, and office expenses. Responses should also include a discussion of the
usefulness of such cost data to analyze the firm’s profitability and pricing of services.
4. LO 2.1 Lizzy’s is a retail clothing store, specializing in formal wear for weddings. They
purchase their clothing for resale from specialty distributors and manufacturers. Recently the
owners of Lizzy’s have noted an increased interest in costume jewelry and fashion accessories
among their clientele. If the owners of Lizzy’s decide to expand their business to include these
products, what cost data would they need to collect and analyze prior to expanding the business?
Solution
Answers will vary. Responses should include a discussion of product costs as well as operating
costs, such as increases in wages, retail space, and advertising. Responses also should include a
discussion of the usefulness of such cost data to analyze the potential profitability and pricing of
the new merchandise.
5. LO 2.2 Identify and describe the three types of product costs in a manufacturing firm.
Solution
Answers will vary but must include direct materials, direct labor, and manufacturing overhead.
6. LO 2.2 Explain the difference between a period cost and a product cost.
Solution
Answers will vary. Responses should include that product costs are all costs associated with the
acquisition or production of goods and products and that period costs are composed of all costs
that are not product costs.
7. LO 2.2 Explain the concept of relevant range and how it affects total fixed costs.
Solution
Answers will vary but should include that fixed costs remain fixed in total across the relevant
range, bounded by a minimum and maximum activity level. Once the maximum activity level in
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