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Managerial Accounting, 3e (Braun/Tietz)
Chapter 2 Building Blocks of Managerial Accounting
1) Service companies must carry a large amount of inventory to meet consumer demand.
Answer: FALSE
Diff: 1
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
2) Manufacturing companies usually have three types of inventory.
Answer: TRUE
Diff: 1
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
3) Retailers sell their products to consumers.
Answer: TRUE
Diff: 1
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
4) Merchandising companies include both wholesalers and retailers.
Answer: TRUE
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
5) All companies have the same types of inventories.
Answer: FALSE
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
2
6) Only manufacturing companies have finished goods inventory.
Answer: TRUE
Diff: 2
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
7) Which of the following are merchandising companies?
A) Manufacturers
B) Retailers
C) Wholesalers
D) Both retailers and wholesalers
Answer: D
Diff: 1
LO: 2-1
EOC: E2-15A
AACSB: Analytical Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
8) Which of the following types of companies has raw materials, work in process and finished goods
inventory?
A) Retailers
B) Manufacturers
C) Wholesalers
D) Service companies
Answer: B
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
9) Which type of company makes up the largest sector of the United States economy?
A) Manufacturers
B) Merchandising
C) Wholesalers
D) Service companies
Answer: D
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
3
10) The balance sheet of a service company has
A) raw materials inventory.
B) little or no inventory.
C) three categories of inventory.
D) two categories of inventory.
Answer: B
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
11) Schlabig & Associates, a public accounting firm, is what type of company?
A) Manufacturer
B) Retailer
C) Service
D) Wholesaler
Answer: C
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
12) Jiffy Lube, an automotive maintenance company, is primarily what type of company?
A) Manufacturer
B) Retailer
C) Wholesaler
D) Service
Answer: D
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
4
13) Among other products, Nabisco makes Oreo cookies. Which type of company is Nabisco?
A) Service
B) Manufacturer
C) Retailer
D) Wholesaler
Answer: B
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
14) Which type of company typically produces its own inventory?
A) Manufacturer
B) Service company
C) Retailer
D) Wholesaler
Answer: A
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
15) What type of company resells products it purchases ready-made from suppliers?
A) Merchandiser
B) Retailer
C) Wholesaler
D) All of the above
Answer: D
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
5
16) Before these materials are used to manufacture its cars, Toyota classifies steel, glass, and plastic as
A) raw materials inventory.
B) finished goods inventory.
C) work in process inventory.
D) merchandise inventory.
Answer: A
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
17) Before these materials are used to manufacture cabinets, a woodworker classifies lumber, paint, and
glue as
A) finished goods inventory.
B) work in process inventory.
C) raw materials inventory.
D) merchandise inventory.
Answer: C
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
18) Macy’s (the department store chain) classifies its clothing held for sale as
A) merchandise inventory.
B) raw materials inventory.
C) work in process inventory.
D) finished goods inventory.
Answer: A
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
6
19) American Eagle Outfitters classifies the denim jeans on the shelves at its retail locations as
A) finished goods inventory.
B) work in process inventory.
C) merchandise inventory.
D) raw materials inventory.
Answer: C
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
20) How would Chevrolet classify its partially completed vehicles?
A) Finished goods
B) Raw materials
C) Work in process
D) Supplies
Answer: C
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
21) In the United States, the fastest growing type of company is
A) merchandising.
B) service.
C) manufacturing.
D) none of the above.
Answer: B
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
7
22) Which of the following is a characteristic of a service company?
A) Service companies make a product.
B) Service companies have a single category of inventory.
C) Service companies generally have no tangible products to sell.
D) Service companies transform raw materials into finished goods.
Answer: C
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
23) A snow removal business would be classified as a
A) manufacturing company.
B) merchandising company.
C) simple company.
D) service company.
Answer: D
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
24) An accounting firm would be classified as a
A) manufacturing company.
B) merchandising company.
C) simple company.
D) service company.
Answer: D
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
8
25) Toshiba Corporation makes computer chips. Toshiba Corporation would be classified as a
A) merchandising company.
B) manufacturing company.
C) service company.
D) simple company.
Answer: B
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
26) Which type of company has three types of inventory?
A) A manufacturing company
B) A merchandising company
C) A service company
D) All of these companies
Answer: A
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
27) For a ________, inventory consists of freight-in and the cost of the product which is to be resold.
A) service company
B) manufacturing company
C) merchandising company
D) all of these companies
Answer: C
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
9
28) A ________ company has the highest percentage of labor costs as compared to the other types of
companies.
A) merchandising
B) service
C) manufacturing
D) All companies have a high percentage of labor costs.
Answer: B
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
29) Which type(s) of companies prepare income statements and balance sheets?
A) Service company
B) Merchandising company
C) Manufacturing company
D) All of these types of companies
Answer: D
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
30) All of the following items would be found in raw materials inventory for a furniture manufacturer
except
A) wood.
B) fabric.
C) steel framing.
D) assembly worker wages.
Answer: D
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
10
31) Which of the following costs could be found in work in process inventory for a candy bar
manufacturer?
A) Assembly worker wages
B) Utilities for administrative offices
C) Depreciation on sales office
D) Customer order forms
Answer: A
Diff: 1
LO: 2-1
EOC: S2-2
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
32) Enter the letter of the type of company on the line in front of each statement. Letters may be used
more than once or not at all.
A) service company
B) merchandising company
C) manufacturing company
____ generally has no inventory
____ has three types of inventory
____ inventory consists of freight-in and the cost of the product
____ has the highest percentage of labor costs
____ Wal-Mart is this type of company
Answer: A, C, B, A, B
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
11
33) On the line in front of each statement, enter the letter corresponding to the term that best fits that
statement. You may use a letter more than once and some letters may not be used at all.
A. Materials inventory E. Work in process inventory
B. Service companies F. Manufacturing companies
C. Merchandise inventory G. Merchandising companies
D. Finished goods inventory
____ typically have a single category of inventory
____ resell products they previously purchased ready-made from suppliers
____ do not have inventory for resale
____ produce its own inventory
____ transform raw materials into new finished products
____ ready to sell inventory of manufacturers
____ partially completed items of manufacturers
Answer:
G typically have a single category of inventory
G resell products they previously purchased ready-made from suppliers
B do not have inventory for resale
F produce its own inventory
F transform raw materials into new finished products
D ready to sell inventory of manufacturers
E partially completed items of manufacturers
Diff: 2
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
34) Describe service, merchandising, and manufacturing companies.
Answer: Service companies sell intangible services such as insurance, consulting and healthcare. Salaries
and wages often are the largest part of their costs. They usually do not have inventory or cost of goods
sold accounts, although some service companies will have a small amount of supplies inventory which is
used for their own use and not for sale to customers. Merchandising companies resell tangible products
they buy from suppliers. Retailers and wholesalers are both types of merchandising companies.
Merchandisers have inventory. Manufacturing companies use labor, plant and equipment to convert raw
materials into finished products which they sell to other companies. They have three types of inventory—
raw materials, work in process, and finished goods.
Diff: 2
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
12
35) Explain the difference between raw materials inventory, work in process inventory, and finished
goods inventory.
Answer: Raw materials inventory includes all materials used to make a product including materials that
become a part of the product as well as other physical materials used in a plant such as machine
lubricants and janitorial supplies. Work in process inventory includes goods that are partway through the
manufacturing process but not yet complete. Finished goods inventory includes completed goods that
have not yet been sold.
Diff: 1
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
36) Describe a company that has some elements of all three types of companies. It is part service
company, part manufacturer, and part merchandiser.
Answer: Many restaurants fall into this category. They are a service company since they serve hungry
customers. They are a manufacturer since they convert raw ingredients into finished meals and they are a
merchandiser since they sell ready-to-serve bottles of beer and wine.
Diff: 2
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
37) Why do service firms not have inventory costs pertaining to items to be sold? What type of costs do
they have?
Answer: Service firms do not have inventory costs because services cannot be produced today and stored
up to sell later. They do not have inventory. They only have period costs that are expensed.
Diff: 2
LO: 2-1
EOC: S2-1
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
38) Controlling costs across the entire value chain often requires a trade-off between the individual
elements of the value chain.
Answer: TRUE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
13
39) All of the components of manufacturing–from research and development through customer service
after the sale–are part of a firm’s value chain.
Answer: TRUE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
40) The activities in the value chain must take place in a specific order.
Answer: FALSE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
41) The value chain concept helps companies control costs over the value chain as a whole.
Answer: TRUE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Analytical Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
42) Research and development is needed to improve products and to design new products.
Answer: TRUE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
43) Receipt of materials is part of the firm’s value chain.
Answer: TRUE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Analytical Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
14
44) A company’s distribution system is an important part of the value chain.
Answer: TRUE
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
45) For a merchandising company, the costs of shipping inventory to the retail outlet is associated with
which element of the value chain?
A) Design
B) Distribution
C) Production and Purchases
D) Customer Service
Answer: B
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
46) All of the following are part of a company’s value chain except
A) design.
B) distribution.
C) administration.
D) marketing.
Answer: C
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
47) Which of the following activities is not included in the value chain?
A) Reporting
B) Design
C) Production
D) Customer service
Answer: A
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
15
48) All of the following activities are included in the value chain except
A) customer service.
B) design.
C) safety.
D) production.
Answer: C
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
49) Which of the following would not be included in the value chain?
A) Website development costs
B) Costs to deliver product to retail outlets
C) Costs of print advertisements
D) All of these costs would be included as part of the value chain.
Answer: D
Diff: 2
LO: 2-3
EOC: S2-4
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
50) The value chain is used by
A) service, manufacturing and merchandising businesses.
B) only service and manufacturing businesses.
C) only service and merchandising businesses.
D) only manufacturing and merchandising businesses.
Answer: A
Diff: 2
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
16
51) Collectively, all costs such as distribution, marketing, and design are part of
A) downstream activities.
B) fixed costs.
C) the value chain.
D) manufacturing costs.
Answer: C
Diff: 21
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
52) What is the promotion of products and services known as?
A) Customer service
B) Marketing
C) Distribution
D) Design
Answer: B
Diff: 1
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
53) All of the following relate to part of the value chain for a clothing company except
A) cost of advertising the new products.
B) administrative costs.
C) cost of shipping to retailers.
D) salaries of clothing designers.
Answer: B
Diff: 2
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
17
54) Which part of the value chain would depreciation on a factory be classified as?
A) Design
B) Distribution
C) Research and development
D) Production
Answer: D
Diff: 1
LO: 2-2
EOC: E2-23A
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
55) Testing ways to increase the strength of your product would be classified as which part of the value
chain?
A) Design
B) Distribution
C) Production
D) Research and development
Answer: D
Diff: 1
LO: 2-2
EOC: E2-23A
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
56) Which part of the value chain would a technical support hotline for customers be considered?
A) Design
B) Customer service
C) Distribution
D) Marketing
Answer: B
Diff: 21
LO: 2-2
EOC: E2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
18
57) Advertising expenses would be considered which part of the value chain?
A) Customer service
B) Marketing
C) Production
D) Research and development
Answer: B
Diff: 2
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
58) The costs associated with reengineering machinery and its location within the factory to increase
efficiency would be considered which part of the value chain?
A) Customer service
B) Marketing
C) Research and development
D) Design
Answer: D
Diff: 2
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
59) The costs incurred to get merchandise to a company’s retail store would be considered to be what part
of the value chain?
A) Marketing
B) Customer service
C) Production or purchases
D) Research and development
Answer: C
Diff: 2
LO: 2-2
EOC: S2-3
AACSB: Reflective Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
19
60) Lucky Cow Dairy provided the following expense information for May:
Assembly-line workers’ wages $ 72,000
Caps for milk bottles 3,000
Reconfiguring the assembly line 125,000
Customer support hotline 10,000
Delivery expenses 20,000
Depreciation on factory equipment 75,000
Plastic milk bottles 52,000
Salaries of salespeople 63,000
Salaries of research scientists 70,000
Customer toll-free order line 6,000
What is the total cost of research and development?
A) $73,000
B) $70,000
C) $55,000
D) $195,000
Answer: B
Diff: 21
LO: 2-2
EOC: E2-33B
AACSB: Analytical Thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes
in costs and volume on a company’s profits
