Managerial Accounting Quiz: Checking Reasonableness

What this quiz covers

This quiz focuses on Checking Reasonableness, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. A significant variable cost, such as direct labor, was incorrectly classified as a period fixed cost in the analysis.
2. A significant fixed cost, such as factory insurance, was incorrectly classified as a per-unit variable cost in the analysis. (correct answer)
3. The total fixed costs were accidentally understated by a material amount in the break-even formula.
4. The analysis was based on last year's selling price, which was 10% higher than the current year's price.

Question 2

1. The purchasing department's excellent negotiation skills secured low-cost materials, but the production team was inefficient in using them.
2. The purchasing department likely acquired substandard materials at a discount, which led to excessive waste and spoilage during production. (correct answer)
3. The accounting department is likely using outdated material price standards, which makes any purchase seem favorable, while production quotas were missed.
4. This combination of variances is statistically improbable and most likely indicates a significant error in the accounting records or data entry.

Question 3

1. Immediately approve the project to capitalize on the exceptionally high return before market conditions change.
2. Request a sensitivity analysis to see how the IRR changes if the cost of capital increases to 15%.
3. Reject the project because the IRR is so far outside the typical range that it cannot be considered a reliable investment.
4. Scrutinize the analysis for data input errors, such as an incorrect sign for the initial investment or an extra zero on a future cash inflow. (correct answer)

Question 4

1. The ABC system is likely configured incorrectly, as overhead costs should generally correlate with direct labor hours.
2. The result is plausible because the complex product likely consumes a disproportionately high amount of costly activities like machine setups, engineering changes, and inspections. (correct answer)
3. The high overhead allocation is a clear signal that the custom product line should be discontinued immediately to improve overall company profitability.
4. The traditional costing system was more accurate because it correctly smoothed overhead costs across all product lines based on production volume.

Question 5

1. The company must have significantly reduced its variable manufacturing costs per unit during the quarter.
2. Fixed manufacturing overhead costs from the current period were deferred in ending inventory, increasing reported income. (correct answer)
3. The reported figures are contradictory and indicate a high probability of an accounting error in the income statement.
4. Selling and administrative expenses must have decreased dramatically to offset the decline in sales revenue.

Question 6

1. The marketing department's price projection is too pessimistic and should be revised upwards.
2. The direct labor wage rate is too high, and negotiations should begin with the union to reduce it.
3. The product is not financially viable as currently designed, as it has a negative contribution margin before even considering materials and overhead. (correct answer)
4. The team should proceed with the launch, as initial losses are common for new products and can be recouped later.

Question 7

1. The discount rate used in the analysis was set too high.
2. The projected annual production volume was significantly overestimated. (correct answer)
3. The salvage value of Machine B was assumed to be zero.
4. The useful life of Machine A was assumed to be shorter than that of Machine B.

Question 8

1. The calculation must be wrong because equivalent units cannot be less than the number of units transferred out. (correct answer)
2. It is plausible if the ending work-in-process inventory is 0% complete with respect to conversion costs.
3. This result suggests that Department B is operating inefficiently, producing significant spoilage.
4. The number of units started in the period must have been less than the number of units transferred out.

Question 9

1. The company made a large strategic purchase of raw materials near year-end to hedge against a forecasted 50% price increase from its supplier. (correct answer)
2. The company switched to a just-in-time inventory system during the year to reduce carrying costs.
3. Sales revenue increased by 10% during the year, but the cost of goods sold remained flat.
4. Several major customers unexpectedly went bankrupt, leaving the company with large amounts of finished goods that cannot be sold.

Question 10

1. The incremental international freight, insurance, and customs duties for shipping to the new country. (correct answer)
2. The fixed factory overhead that would be allocated to the order.
3. The historical average manufacturing cost per unit for existing products.
4. The opportunity cost of using the plant's excess capacity.

Question 11

1. The variable cost per unit is likely to increase at higher production volumes due to economies of scale.
2. The cost formula is unreliable because it was not created using the high-low method.
3. The projection is outside the relevant range of the original data, where the assumed cost behaviors may not hold true. (correct answer)
4. Fixed costs of $2,000,000 are too high for this type of production and likely contain a calculation error.

Question 12

1. The transfer price should be based on variable cost only, which is $70, to avoid transferring artificial profits.
2. From the company's perspective, the transfer should occur because the external price of $95 is higher than the internal variable cost of $70.
3. Since the selling division is at full capacity, its opportunity cost is the contribution margin on lost external sales, making the external price of $95 the most relevant benchmark.
4. The transfer is unreasonable for the buying division as it would be forced to pay $5 more than the market price, negatively impacting its divisional performance metrics. (correct answer)

Question 13

1. The project is exceptionally attractive and should be funded immediately due to its rapid return of the initial investment.
2. The payback period is a poor metric, and the decision should be based solely on the project's Net Present Value.
3. The projected first-year cash inflows are likely overly optimistic or contain an error, as such a short payback period is highly unusual for this type of asset. (correct answer)
4. The calculation correctly indicates low risk, making it a priority project regardless of its profitability.

Question 14

1. Job #451 was a low-volume, high-complexity job that consumed significant non-volume-related resources not captured by direct labor hours. (correct answer)
2. The predetermined overhead rate was set too low at the beginning of the period.
3. The direct labor workers on Job #451 were highly inefficient, leading to excessive labor hours and thus excessive applied overhead.
4. There must have been a calculation error, as a 5-fold difference between applied and actual overhead is not possible.

Question 15

1. The manager is attempting to build slack into the budget to make it easier to meet performance targets.
2. The manager anticipates a significant increase in the purchase price of supplies and is budgeting accordingly.
3. The budget is unreasonable because variable costs should not increase if the activity level does not increase.
4. The director should investigate whether the manager anticipates price increases or a decline in material usage efficiency. (correct answer)

Question 16

1. The total fixed costs associated with the production facility.
2. The number of machine hours required to produce one unit of Alpha and one unit of Beta. (correct answer)
3. The current market demand and selling price for each product.
4. The amount of direct labor hours required for each product.

Question 17

1. Outsourcing should be chosen, as it generates a clear $50,000 annual cost savings for the company.
2. The quantitative difference is immaterial, so the decision should be based almost entirely on qualitative factors like supplier reliability and quality control. (correct answer)
3. The analysis is likely flawed, as a real-world make-or-buy decision would typically show a much larger cost differential.
4. The decision should be delayed for a year to see if the cost savings from outsourcing increase to a more substantial level.

Question 18

1. The total supplies cost in the original static budget.
2. The purchasing department's records of actual prices paid for supplies during the period.
3. The per-unit supplies cost allowed in the flexible budget for the actual level of output. (correct answer)
4. The total actual supplies cost from the previous period.

Question 19

1. The R-squared value is not high enough; a reliable cost model should have an R-squared of at least 0.95.
2. The fixed cost component of $50,000 is an unrealistic amount for monthly utility expenses in a factory setting.
3. A simple linear regression is inappropriate; utility costs are driven by multiple factors that require a multiple regression model.
4. The negative coefficient for machine hours implies that utility costs decrease as production activity increases, which is illogical. (correct answer)

Question 20

1. Verify that the $20,000 advertising cost is properly classified as a period cost rather than being allocated to inventory
2. Confirm that increasing Standard production by 400 units will not require additional fixed costs or change the variable cost structure (correct answer)
3. Ensure that the contribution margin calculation includes both the per-unit margin and the volume effect of the sales increase
4. Check whether the 40% increase in Standard sales might cannibalize Premium sales despite the assumption of no effect