Question

Question 1
Which of the following is true at breakeven point?
a) Sales revenue = variable cost
b) Profit = fixed cost + variable cost
c) Sales revenue = total cost – variable cost
d) Contribution = fixed cost
Question 2
An increase in fixed costs will result in which of the following:
a) A decrease in the contribution to sales ratio
b) A decrease in the contribution per unit
c) An increase in the breakeven point sales
d) An increase in the margin of safety
Question 3
Where opening inventory of 50 units of finished goods are valued at GHS10 each and the average
unit cost of 500 units produced during the period is GHS8.90, which method of inventory valuation
gives a closing inventory value of GHS9.00 per unit?
a) FIFO
b) Weighted average
c) Absorption cost based on normal activity
d) Marginal cost
Question 4
Which of the following is true when sales units remain constant each month but production units
fluctuate?
a) Profit reported each month will always fluctuate in proportion to units produced
b) Absorption cost inventory valuation will lead to a higher profit being reported than that
where marginal cost inventory valuation is used where sales exceed production
c) Marginal cost inventory valuation will give a higher profit than absorption cost inventory
valuation where sales exceed production
d) Marginal cost inventory valuation will result in the same profit being reported each month
Question 5
For performance reporting, it is best to compare actual costs with budgeted costs using:
a) Flexible budgets
b) Static budgets
c) Master budgets
d) Short-term budgets

Answer 1

1. Option D. Contribution = Fixed Cost

Explanation : Contribution - Fixed cost = Profit/ (loss)

At Breakeven point - there will be neither profit nor loss

Contribution - Fixed cost = 0 (At Break even)

Contribution = Fixed cost

2. Option C. An increase in fixed costs will result in - An increase in Breakeven point sales

  Explanation: 1. Sales - variable cost = Contribution , So contribution or contribution ration will not get effected by change in fixed costs

2. Breakeven sales = Fixed cost / Contribution per unit, Breakeven sales are directly proportional to fixed cost, since if fixed cost increases breakeven sales will also get increased

3. Total sales - Breakeven sales = Margin of safety sales, i.e. if fixed cost increases, then breakeven sales will decrease then margin of sales will decrease.

3. Option B. Weighted Average cost Method

Explanation: (50units *10 + 500units * 8.9) / 50+500 = GHS 9 per unit

4. Option C. Marginal cost inventory valuation will give a higher profit than absorption cost inventory valuation where sales exceeds production

5. Option A. Flexible budgets, Since flexible budgets are prepared for actual levels of output unlike static budgets