D774 Introduction to Business Accounting - Set 5 - Part 3

Correct Answer: How they spread overhead

Direct materials and direct labor are simply traced in every system, so the interesting differences come from how each system spreads overhead. Job order, process, and activity-based costing differ largely in how cleverly they allocate indirect costs. Option a is incorrect because tracing direct materials is easy and handled the same way in every system; since materials present no allocation puzzle, they cannot be where the costing systems meaningfully diverge from one another. Option c is incorrect because recording direct labor wages is straightforward and consistent across the systems; direct labor traces cleanly to output, so it is not the area where job order, process, and activity-based methods differ. Option d is incorrect because setting the selling price is a pricing decision that follows costing, not part of how a costing system assigns costs; the systems differ in spreading overhead, not in choosing what to charge customers.

Correct Answer: Cost pool and cost driver

A cost pool is a group of individual costs combined for allocation, such as all delivery costs gathered together. A cost driver is the factor that causes those costs to grow, like delivery miles, which allocates the pool. Option a is incorrect because a segment is a separately identifiable business unit and a center assigns responsibility for results; neither term describes gathering costs for allocation or naming the factor that causes a cost to grow. Option b is incorrect because prime cost and conversion cost are production-cost groupings built from materials, labor, and overhead; they do not name the activity-based concepts of a collected cost group and its causal allocation factor. Option c is incorrect because a cost object is the thing being costed and a segment is a business unit; the question asks for the gathered group of costs and its causal factor instead, neither of which these terms name.

Correct Answer: It charges products by activities used

Activity-based costing charges each product based on how much of each activity it actually uses, so a product triggering an expensive activity bears more of it. With diverse lines and heavy overhead, this fixes the distortion of spreading evenly. Option a is incorrect because the overhead is never eliminated; those indirect costs still exist and must be assigned somewhere. What changes is the accuracy of allocation, with each product charged for the activities it truly consumes. Option c is incorrect because averaging everything into one rate is the crude approach this method replaces; lumping diverse products under a single measure is exactly the distortion that causes the mispricing the managers suspect. Option d is incorrect because overhead stays indirect and is never reclassified as direct labor; the method simply improves accuracy by tracing those indirect costs to products through their activities and cost drivers.

Correct Answer: Merchandising business

A merchandising business buys finished goods and resells them unchanged, so its main product cost is the purchase cost of the goods, which flows into cost of goods sold when they sell. A reseller of sneakers fits this exactly. Option a is incorrect because a manufacturing business produces tangible goods from materials and labor, carrying the full materials, labor, and overhead picture; the store makes nothing, it only resells finished sneakers, so it is not a manufacturer. Option b is incorrect because a service business provides intangible output with no physical product to sell; the shoe store clearly sells a tangible product it purchased, which rules out the service classification. Option d is incorrect because an investment center is a responsibility center accountable for profits and capital, not a category of business by what it sells; the question asks the business type, which is merchandising.

Correct Answer: Contribution margin

Contribution margin is the amount left from each sale after variable costs are subtracted. It contributes first to covering fixed costs and then to profit. The leftover per pastry after its variable cost is precisely the contribution margin. Option a is incorrect because gross profit is sales revenue minus cost of goods sold, a figure that nets out product costs in total; the per-sale leftover after only variable cost is the contribution margin, defined differently. Option b is incorrect because conversion cost combines direct labor and manufacturing overhead, a production-cost grouping; it does not describe what remains from a sale once the variable cost is taken out of the price. Option c is incorrect because the break-even point is the number of units where profit is zero, a volume figure; it is not the per-unit leftover after variable cost, which is what the owner is describing here.

Correct Answer: Contribution margin ratio

The contribution margin ratio expresses contribution margin as a fraction of the selling price, found by dividing contribution margin per unit by selling price. It shows the share of each sales dollar that goes toward fixed costs and then profit. Option a is incorrect because gross profit is sales minus cost of goods sold stated in dollars, not contribution as a share of price; it nets total product costs rather than isolating the variable-cost relationship the ratio captures. Option b is incorrect because break-even units is a count of how many units cover all costs, a volume figure rather than a ratio; the manager wants contribution as a percentage of each sales dollar instead. Option d is incorrect because profit margin percentage measures the slice of sales left as profit after cost of goods sold; it is not the contribution margin as a fraction of price, which subtracts only variable cost.

Correct Answer: Fixed costs divided by contribution margin

The break-even point in units is fixed costs divided by the contribution margin per unit. Each unit contributes its margin toward the fixed-cost pile, so that division yields the units needed to cover the fixed costs. Option a is incorrect because selling price minus variable cost gives the contribution margin itself, one ingredient of the break-even formula rather than the break-even volume; you still must divide fixed costs by that margin to find units. Option b is incorrect because multiplying fixed costs by the contribution margin would not yield a unit count; break-even comes from dividing fixed costs by the per-unit margin, since each unit chips away at the fixed-cost total. Option c is incorrect because the division is upside down; placing contribution margin on top and fixed costs beneath does not produce the units needed. Break-even puts fixed costs on top, divided by the margin per unit.

Correct Answer: It falls

Break-even units equal fixed costs divided by contribution margin per unit. Cutting fixed costs shrinks the numerator and raising contribution margin enlarges the denominator, and either move lowers the quotient, so the break-even point falls. Option a is incorrect because the break-even point rises only when fixed costs increase or the contribution margin shrinks; cutting fixed costs or lifting the margin pushes the figure down instead, which is precisely the owner's goal. Option b is incorrect because both moves change the formula's inputs, so the break-even point cannot stay unchanged; a smaller numerator or a larger denominator necessarily lowers the number of units needed to break even. Option d is incorrect because a break-even point cannot turn negative; you cannot sell fewer than zero units. Reducing fixed costs or raising the margin simply lowers a positive figure, it does not drive it below nothing.

Correct Answer: It rises

Lowering the price while variable cost stays put shrinks the contribution margin per unit. A smaller margin in the denominator means more units are needed to cover the same fixed costs, so the break-even point rises. Option a is incorrect because the break-even point does not hold steady when price changes; cutting the price reduces each unit's margin, which alters the formula's denominator and pushes the required volume upward rather than leaving it flat. Option b is incorrect because the direction is fully predictable here: with variable cost and fixed costs unchanged, a lower price means a thinner margin, and a thinner margin forces more units to break even. Option c is incorrect because a price cut shrinks rather than grows what each unit contributes, so it makes break-even climb, not drop; the figure would fall only if the margin widened or fixed costs were reduced.

Correct Answer: Profit margin percentage

Profit margin percentage is gross profit divided by revenue, showing the slice of each sales dollar left as profit. Catering's higher margin revealed it keeps more per dollar, which raw revenue alone hid, so margin identified the better performer. Option b is incorrect because break-even units measures the volume needed to cover costs, not how profitable each sales dollar is; comparing which segment keeps more of every dollar calls for a margin measure, not a break-even count. Option c is incorrect because total fixed costs alone says nothing about which segment turns sales into profit more efficiently; the comparison of profit kept per sales dollar is captured by profit margin percentage instead. Option d is incorrect because total sales revenue is exactly the figure that misled leadership; wholesale looked stronger on revenue while actually keeping a thinner slice per dollar, so raw sales hid the true efficiency the margin exposed.