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CHFD practice questions

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Question 1Financial Accounting and Reporting in Healthcare

Under U.S. GAAP, which financial statement reports the changes in a healthcare organization's net assets without donor restrictions and net assets with donor restrictions for a period?

  1. Statement of operations and changes in net assets Correct answer.
  2. Statement of functional expenses
  3. Statement of cash flows
  4. Statement of financial position

Explanation

Not-for-profit healthcare entities present a statement of operations and changes in net assets that reconciles beginning and ending net assets by class. The statement of financial position reports balances at a point in time, while the cash flow statement explains cash movements.

Question 2Financial Accounting and Reporting in Healthcare

A hospital receives a $500,000 gift from a donor who stipulates that the principal be invested permanently and only the investment income may be spent on nursing education. How should the gift be classified?

  1. A liability until the income is earned
  2. Deferred revenue amortized over the investment life
  3. Net assets without donor restrictions
  4. Net assets with donor restrictions Correct answer.

Explanation

A permanent endowment is a donor-restricted gift because the principal cannot be spent; only the related investment return becomes available for the stipulated purpose. Donor-imposed stipulations create net assets with donor restrictions until the restriction is met or expires.

Question 3Financial Accounting and Reporting in Healthcare

Which measure best reflects a hospital's core patient service margin excluding investment returns and other non-operating items?

  1. Operating margin Correct answer.
  2. Total margin
  3. Days cash on hand
  4. Current ratio

Explanation

Operating margin compares operating income to operating revenue and isolates results from patient care and related activities. Total margin includes non-operating items such as investment income, so it does not isolate core performance.

Question 4Financial Accounting and Reporting in Healthcare

A healthcare entity bills patients and third-party payers for services. Under accrual accounting, when should patient service revenue be recognized?

  1. When the claim is adjudicated by the payer
  2. When cash is collected from the payer
  3. When the service is performed and the right to consideration is established Correct answer.
  4. When the fiscal year closes

Explanation

Accrual accounting recognizes revenue when performance obligations are satisfied, which for patient services is when care is delivered. Collection timing and payer adjudication affect estimation of the transaction price, not the recognition event.

Question 5Financial Accounting and Reporting in Healthcare

A hospital's allowance for doubtful accounts relates to self-pay patients. Under current U.S. GAAP for healthcare entities, how is the provision for uncollectible self-pay balances typically presented?

  1. As a direct charge to net assets without donor restrictions
  2. As an operating expense
  3. As a contra-liability
  4. As a reduction of patient service revenue Correct answer.

Explanation

Under ASC 606 as applied to healthcare, implicit price concessions for self-pay patients are treated as reductions of the transaction price, so they reduce patient service revenue. They are not reported as bad debt expense in the operating expense section.

Question 6Financial Accounting and Reporting in Healthcare

A not-for-profit hospital reports investment income of $2,000,000 on endowment funds. Of that amount, $300,000 is restricted by donor stipulation for a specific research program and $1,700,000 is unrestricted investment return. How should the unrestricted portion be presented?

  1. As an increase in net assets with donor restrictions
  2. As a direct credit to the permanently restricted endowment principal
  3. As a deferred inflow until appropriated by the board
  4. As an increase in net assets without donor restrictions Correct answer.

Explanation

Investment return that is not subject to donor restriction increases net assets without donor restrictions, even when the related principal is restricted. Only the portion carrying a donor purpose restriction is reported in net assets with donor restrictions.

Question 7Financial Accounting and Reporting in Healthcare

A hospital issues bonds at a premium. How does the premium affect the carrying amount and interest expense over the bond's life under the effective interest method?

  1. It has no effect on carrying amount or interest expense
  2. It decreases carrying amount and increases interest expense
  3. It increases carrying amount and increases interest expense
  4. It decreases carrying amount and decreases interest expense Correct answer.

Explanation

A premium means the coupon rate exceeds the market rate, so the issuer's effective interest expense is below the cash coupon. Amortizing the premium reduces the carrying amount toward face value over the term.

Question 8Financial Accounting and Reporting in Healthcare

A healthcare system reports net patient service revenue of $40 million and operating expenses of $37 million. It also earned $2 million of unrestricted investment income. What is the operating margin?

  1. 5.0%
  2. 12.5%
  3. 2.5%
  4. 7.5% Correct answer.

Explanation

Operating margin equals operating income divided by operating revenue: ($40M − $37M) ÷ $40M = 7.5%. Investment income is non-operating and is excluded from the operating margin calculation.

Question 9Financial Accounting and Reporting in Healthcare

Which of the following is reported in the operating section of a hospital's statement of operations rather than as an other item?

  1. Revenue from cafeteria sales to employees and visitors Correct answer.
  2. Gain on sale of a building
  3. Interest expense on long-term debt
  4. Unrealized gains on trading securities

Explanation

Cafeteria and other auxiliary sales are part of ongoing operations and are reported as other operating revenue. Investment gains and asset sale gains are typically non-operating, and interest expense is reported below operating income.

Question 10Financial Accounting and Reporting in Healthcare

A hospital has current assets of $60 million, current liabilities of $30 million, and inventory of $8 million. What is its quick (acid-test) ratio?

  1. 0.50
  2. 1.27
  3. 1.73 Correct answer.
  4. 2.00

Explanation

The quick ratio excludes inventory from current assets: ($60M − $8M) ÷ $30M = 1.73. Inventory is excluded because it may not convert to cash quickly in a healthcare setting.

Question 11Financial Accounting and Reporting in Healthcare

A not-for-profit hospital receives a promise to give $1,000,000 that is conditioned on the hospital opening a new cancer center within two years. How should the promise be reported at the date of the pledge?

  1. As contribution revenue with donor restrictions
  2. No revenue is recognized until the condition is substantially met Correct answer.
  3. As contribution revenue without donor restrictions
  4. As a receivable with an offsetting deferred expense

Explanation

A donor-imposed condition creates a barrier that must be overcome before the gift becomes unconditional. Until the condition is substantially met, the promise is not recognized as contribution revenue.

Question 12Financial Accounting and Reporting in Healthcare

Which cost classification method assigns costs to both intermediate and final cost centers to determine the full cost of patient services?

  1. Variable costing
  2. Contribution margin analysis
  3. Direct costing
  4. Step-down allocation Correct answer.

Explanation

Step-down allocation distributes service department costs to other departments in sequence, ultimately producing fully loaded patient service costs. Direct and variable costing stop short of allocating overhead to final cost centers.

Question 13Financial Accounting and Reporting in Healthcare

A hospital's contractual allowances and discounts increased significantly during the year while gross charges remained flat. What is the most likely effect on net patient service revenue?

  1. Gross charges decrease proportionally
  2. Net patient service revenue is unchanged
  3. Net patient service revenue increases
  4. Net patient service revenue decreases Correct answer.

Explanation

Net patient service revenue equals gross charges less contractual allowances and discounts, so rising deductions reduce net revenue when gross charges are constant. The deductions represent the difference between established rates and amounts expected from payers.

Question 14Financial Accounting and Reporting in Healthcare

A hospital classifies a lease of imaging equipment as a finance lease. How should the hospital initially recognize the lease?

  1. As a prepaid asset equal to total undiscounted payments
  2. As a disclosure only, with no balance sheet recognition
  3. As an operating expense in the period the lease is signed
  4. As a right-of-use asset and a lease liability at the present value of lease payments Correct answer.

Explanation

Under ASC 842, a lessee recognizes a right-of-use asset and a lease liability measured at the present value of future lease payments for finance and operating leases alike. Expense recognition follows the lease classification over the term.

Question 15Financial Accounting and Reporting in Healthcare

A healthcare organization has days cash on hand of 45 days, and management wants to improve liquidity. Which action most directly increases days cash on hand, all else equal?

  1. Increasing capital expenditures on new equipment
  2. Increasing the allowance for doubtful accounts
  3. Extending payment terms to vendors
  4. Accelerating collection of patient accounts receivable Correct answer.

Explanation

Days cash on hand measures available cash relative to daily operating expenses; faster receivable collection raises cash without changing the expense base. The other actions either consume cash or reduce reported receivables without adding cash.

Question 16Financial Accounting and Reporting in Healthcare

Which of the following best describes the purpose of the statement of functional expenses for a not-for-profit hospital?

  1. To reconcile cash flows from operations to net income
  2. To report only the salaries and wages incurred during the period
  3. To report expenses by both natural classification and program or support function Correct answer.
  4. To disclose the fair value of investments held at year-end

Explanation

The statement of functional expenses presents expenses by natural category, such as salaries and supplies, and allocates them between program services and supporting activities. This dual presentation helps users assess how resources are used.

Question 17Financial Accounting and Reporting in Healthcare

A hospital records charity care for patients who qualify under its financial assistance policy. How is charity care typically reported under U.S. GAAP for healthcare entities?

  1. As a reduction of net assets with donor restrictions
  2. As an operating expense in the period services are provided
  3. As a note disclosure of the cost of charity care, excluded from revenue and receivables Correct answer.
  4. As patient service revenue with an equal allowance

Explanation

Charity care is generally not reported as revenue or as an expense; entities disclose the cost of charity care and the policy applied in the notes. Because no expectation of payment exists, these services fall outside patient service revenue.

Question 18Financial Accounting and Reporting in Healthcare

A hospital's board designates $5 million of unrestricted cash for a future facility expansion. How should this board designation be reported?

  1. Within net assets without donor restrictions, with disclosure of the board designation Correct answer.
  2. As a liability for future construction
  3. As net assets with donor restrictions
  4. As a reduction of cash on the balance sheet

Explanation

Board designations are internal decisions and do not create donor restrictions, so the amounts remain in net assets without donor restrictions. U.S. GAAP permits disclosure of board-designated amounts in the notes or on the face of the statement.

Question 19Financial Accounting and Reporting in Healthcare

A hospital's net accounts receivable increased from $12 million to $15 million while net patient service revenue stayed constant at $60 million. What does this trend most likely indicate?

  1. Increased charity care write-offs
  2. Slower collection of patient accounts Correct answer.
  3. Improved collection speed
  4. Reduced contractual allowances

Explanation

Rising receivables on flat revenue lengthens the collection period, suggesting slower cash conversion. Days in accounts receivable would rise, signaling a working capital concern.

Question 20Financial Accounting and Reporting in Healthcare

Which event requires a healthcare entity to recognize a loss contingency accrual in its financial statements?

  1. A possible malpractice claim that is only reasonably possible
  2. A pending malpractice claim that is probable and reasonably estimable Correct answer.
  3. A lawsuit filed with no estimate of damages available
  4. A remote risk of a regulatory penalty

Explanation

A loss contingency is accrued when the loss is both probable and can be reasonably estimated. If only reasonably possible, disclosure rather than accrual is appropriate.

Question 21Financial Accounting and Reporting in Healthcare

A hospital uses the direct write-off method for a small segment of self-pay accounts instead of estimating implicit price concessions. What is the primary conceptual weakness of this approach?

  1. It overstates cash flows from operations
  2. It understates revenue in the period services are provided
  3. It has no effect on the timing of revenue or expense recognition
  4. It overstates revenue in the period services are provided and understates receivables later Correct answer.

Explanation

The direct write-off method delays recognition of uncollectible amounts until specific accounts fail, overstating revenue and receivables in earlier periods. Estimation at the time of service better matches the expected transaction price to revenue.

Question 22Financial Accounting and Reporting in Healthcare

A hospital reports an operating loss but positive net income because of large investment gains. Which conclusion is most appropriate?

  1. The hospital has excess liquidity
  2. Operating performance is weak and results depend on non-operating investment returns Correct answer.
  3. The hospital's contractual allowances are too low
  4. Core patient care operations are generating sufficient margin

Explanation

A positive total margin driven by investment income masks an operating loss, indicating core operations are not self-sustaining. Analysts separate operating from total margin to assess sustainability.

Question 23Financial Accounting and Reporting in Healthcare

A hospital changes its estimate of implicit price concessions from 3% to 5% of gross charges for the current period. How should this change be accounted for?

  1. As a change in accounting estimate applied prospectively Correct answer.
  2. As a prior-period error correction
  3. As a retrospective change requiring restatement of prior periods
  4. As a change in reporting entity

Explanation

A change in the estimated collection rate is a change in accounting estimate, applied prospectively to current and future periods. Retrospective restatement applies to changes in accounting principle or error corrections, not to revised estimates.

Question 24Financial Accounting and Reporting in Healthcare

A healthcare system has $80 million in long-term debt and $20 million in net assets without donor restrictions plus $10 million in net assets with donor restrictions. What is its debt-to-capitalization ratio using total net assets as capital?

  1. 0.80
  2. 0.62
  3. 0.27
  4. 0.73 Correct answer.

Explanation

Debt-to-capitalization equals debt divided by debt plus net assets: $80M ÷ ($80M + $30M) = 0.73. Total net assets of $30M combine the restricted and unrestricted classes.

Question 25Financial Accounting and Reporting in Healthcare

A hospital enters a lease with variable payments based on machine usage plus fixed base rent. How are the variable usage-based payments treated under ASC 842?

  1. Included in the initial lease liability measurement
  2. Deferred and amortized over the lease term
  3. Recognized as a right-of-use asset adjustment
  4. Excluded from the lease liability and expensed as incurred Correct answer.

Explanation

Variable lease payments that depend on usage or another index are excluded from the initial lease liability and recognized in expense when the triggering event occurs. Only fixed payments and certain index-based payments are included in measurement.

Question 26Financial Accounting and Reporting in Healthcare

Under FASB ASC 954, how should a not-for-profit hospital present donor-restricted gifts whose restrictions have been met during the current year in the statement of operations?

  1. As an other operating revenue item labeled as a restricted contribution
  2. As an increase in net assets without donor restrictions, with the release from restriction shown separately or disclosed Correct answer.
  3. As a component of net patient service revenue
  4. As a direct credit to net assets with donor restrictions without any reclassification

Explanation

When a donor-imposed restriction is satisfied in the same period the gift is recognized, the contribution is reported as revenue without donor restrictions, and the release from restriction is shown separately or disclosed. The substance is that the resource has become available for general use, so it belongs in the unrestricted class.

Question 27Financial Accounting and Reporting in Healthcare

A hospital's gross patient service revenue is $50,000,000 and it records implicit price concessions of $18,000,000. What amount is reported as net patient service revenue?

  1. $50,000,000
  2. $32,000,000 Correct answer.
  3. $18,000,000
  4. $68,000,000

Explanation

Net patient service revenue equals gross charges less implicit price concessions and other adjustments, so $50,000,000 minus $18,000,000 yields $32,000,000. Implicit price concessions are treated as a reduction of the transaction price rather than as a separate expense.

Question 28Financial Accounting and Reporting in Healthcare

Which financial statement of a not-for-profit healthcare entity presents the change in net assets for the period and reconciles the beginning and ending balances of each net asset class?

  1. The statement of functional expenses
  2. The statement of financial position
  3. The statement of operations Correct answer.
  4. The statement of cash flows

Explanation

The statement of operations reports revenues, expenses, and the resulting change in net assets, and it reconciles opening and closing net assets for each class. The statement of financial position shows balances at a point in time rather than the period's change.

Question 29Financial Accounting and Reporting in Healthcare

A hospital's operating income is $6,000,000, interest expense is $2,000,000, and total debt service requirements (principal plus interest) are $5,000,000. Using operating income as the numerator, what is the debt service coverage ratio?

  1. 2.50
  2. 1.20 Correct answer.
  3. 0.83
  4. 3.00

Explanation

Debt service coverage equals operating income divided by total debt service, so $6,000,000 / $5,000,000 = 1.20. The ratio indicates how many times operating earnings cover required principal and interest payments.

Question 30Financial Accounting and Reporting in Healthcare

A hospital pledges a portfolio of marketable securities as collateral for a bank loan. How should the pledged securities be reported?

  1. Reported at fair value with disclosure of the pledge Correct answer.
  2. Reclassified to an offset against the related loan payable
  3. Removed from the balance sheet because they are encumbered
  4. Reported at the lower of cost or fair value as a restricted asset

Explanation

Pledging securities as collateral does not transfer ownership, so the investments remain on the balance sheet at fair value and the pledge is disclosed in the notes. The related loan is reported separately as a liability.

Question 31Financial Accounting and Reporting in Healthcare

A hospital uses the step-down method to allocate support department costs. Which statement describes the defining feature of this method?

  1. Each support department's costs are allocated to remaining departments in sequence, and a closed department receives no further allocations Correct answer.
  2. Support department costs are allocated only to revenue-producing departments in a single simultaneous calculation
  3. Support department costs are not allocated because they are reported as period expenses
  4. Each support department allocates costs to all other departments, including support departments already closed

Explanation

The step-down method orders support departments and allocates each one's costs to all remaining departments, but once a department is closed it receives no further allocated costs. This partial recognition of reciprocal services distinguishes it from the direct and reciprocal methods.

Question 32Financial Accounting and Reporting in Healthcare

A hospital's days in accounts receivable is 62 days, while the peer median is 45 days. Which interpretation is most consistent with this metric?

  1. The hospital has excess cash relative to its revenue
  2. The hospital's gross charges are lower than peers'
  3. The hospital carries more receivables per dollar of revenue than peers Correct answer.
  4. The hospital collects receivables more quickly than peers

Explanation

Days in accounts receivable measures how long revenue remains uncollected, so a higher value than peers indicates slower collection and more receivables tied up per dollar of net revenue. The metric says nothing directly about cash balances or charge levels.

Question 33Financial Accounting and Reporting in Healthcare

A hospital incurs $400,000 of research costs to develop a new clinical protocol and expects future economic benefit from it. How should these costs be treated under generally accepted accounting principles for healthcare entities?

  1. Recorded as a reduction of net assets with donor restrictions
  2. Recognized as an expense when incurred Correct answer.
  3. Deferred and recognized only when the protocol is licensed to another party
  4. Capitalized as an intangible asset and amortized over the expected benefit period

Explanation

Research costs are expensed as incurred because future economic benefit is uncertain until technical feasibility is established. Capitalization is generally limited to certain development costs such as internally developed software once feasibility criteria are met.

Question 34Financial Accounting and Reporting in Healthcare

A hospital receives a gift of $500,000 in cash with a donor stipulation that the principal be invested permanently and only the income be used for nursing education. How is the gift classified?

  1. Deferred revenue amortized over the investment horizon
  2. Net assets with donor restrictions, permanently restricted as to principal Correct answer.
  3. A liability until the income is spent
  4. Net assets without donor restrictions

Explanation

A permanent endowment is a donor-restricted gift whose principal must be maintained, so it is reported in net assets with donor restrictions. Investment income is recognized according to the donor's purpose restriction on its use.

Question 35Financial Accounting and Reporting in Healthcare

A healthcare entity has a 10-year note payable with equal annual principal installments. How should the portion of principal due within the next 12 months be presented?

  1. Entirely as a long-term liability until maturity
  2. As a reduction of net assets without donor restrictions
  3. As a contingent liability disclosed only in the notes
  4. As a current liability, with the remainder reported as long-term debt Correct answer.

Explanation

The principal amount contractually due within one year of the balance sheet date is classified as a current liability, and the remaining balance is presented as long-term debt. This split reflects the timing of the required cash outflow.

Question 36Financial Accounting and Reporting in Healthcare

A hospital reports a defined benefit pension plan with an accumulated benefit obligation of $30,000,000 and plan assets at fair value of $26,000,000. How is the $4,000,000 difference reflected?

  1. As an operating expense in the period the plan was frozen
  2. As a reduction of net assets with donor restrictions
  3. As a deferred charge amortized over the average remaining service life
  4. As a liability for the underfunded status, with related amounts recognized in the financial statements Correct answer.

Explanation

When the benefit obligation exceeds plan assets, the plan is underfunded and the net funded status is recognized as a liability, with the offsetting unrecognized amounts recognized in net assets or expense as applicable. The funded status is measured as plan assets at fair value less the benefit obligation.

Question 37Financial Accounting and Reporting in Healthcare

A hospital's contractual allowances rise sharply because a large payer renegotiated rates downward. What is the most direct effect on the hospital's reported net patient service revenue and gross charges?

  1. Gross charges decrease while net patient service revenue is unchanged
  2. Net patient service revenue decreases while gross charges are unchanged Correct answer.
  3. Both net patient service revenue and gross charges decrease by the same amount
  4. Net patient service revenue increases because allowances are reported as revenue

Explanation

Gross charges are set by the hospital's chargemaster and are unaffected by payer contracts, but lower negotiated rates increase implicit price concessions and reduce net patient service revenue. The allowance is a deduction from gross charges rather than a revenue item.

Question 38Financial Accounting and Reporting in Healthcare

A hospital operates a gift shop that is reported as a supporting service rather than a program service. How should the gift shop's direct costs and any related revenue be reported?

  1. Report the revenue as program revenue and the costs as program expenses
  2. Include the costs among supporting services and report the revenue as other revenue Correct answer.
  3. Exclude both the revenue and the costs from the statement of operations
  4. Net the revenue against the costs and report only the net amount

Explanation

Activities that do not fulfill a program purpose are supporting services, so their costs are reported in the supporting services category and any revenue is reported separately as other revenue. Gross amounts are presented rather than netted.

Question 39Financial Accounting and Reporting in Healthcare

A hospital's operating margin is 2% while its total margin is 9% because of large nonoperating investment gains. What does this pattern most likely indicate?

  1. Investment performance is masking weak results from patient care operations Correct answer.
  2. Core patient care operations are generating strong and improving surpluses
  3. The hospital has excessive contractual allowances relative to peers
  4. The hospital's days cash on hand must be declining

Explanation

A wide gap between total margin and operating margin shows that results depend heavily on nonoperating items such as investment returns rather than on patient care. Because investment gains are volatile, this pattern signals that the core operating results are thin.

Question 40Financial Accounting and Reporting in Healthcare

A hospital is the defendant in a malpractice lawsuit. Legal counsel concludes that a loss is probable and can be reasonably estimated at $2,000,000. How should the hospital account for this claim?

  1. Recognize the amount as a reduction of net assets with donor restrictions
  2. Record the amount as a receivable from the malpractice insurer
  3. Accrue a $2,000,000 liability and recognize the related expense Correct answer.
  4. Disclose the claim in the notes only, with no accrual

Explanation

A loss contingency is accrued when a loss is both probable and reasonably estimable, so the estimated $2,000,000 is recognized as a liability and a charge to expense. Disclosure alone is appropriate only when the loss is not both probable and estimable.

Question 41Managerial Accounting and Cost Analysis

A manufacturer uses a predetermined overhead rate based on direct labor hours. Which of the following best describes the primary purpose of using a predetermined rate rather than actual overhead costs?

  1. To assign overhead to jobs as work is performed, smoothing cost recognition over the period Correct answer.
  2. To convert fixed overhead into a variable cost for internal reporting
  3. To eliminate the need for a year-end adjustment of over- or underapplied overhead
  4. To guarantee that total overhead applied equals total overhead actually incurred

Explanation

A predetermined overhead rate lets a company assign overhead to products or jobs throughout the period as work is done, rather than waiting until actual overhead is known at period-end. Because the rate is based on estimated overhead and estimated activity, applied overhead rarely equals actual overhead, so a year-end variance remains.

Question 42Managerial Accounting and Cost Analysis

A company produces a product with the following per-unit information: selling price $50, variable cost $30, and total fixed costs $120,000. What is the break-even point in units?

  1. 12,000 units
  2. 4,000 units
  3. 6,000 units Correct answer.
  4. 2,400 units

Explanation

Unit contribution margin is $50 − $30 = $20. Break-even units equal fixed costs divided by unit contribution margin: $120,000 ÷ $20 = 6,000 units.

Question 43Managerial Accounting and Cost Analysis

In a job-order costing system, which document serves as the primary source for charging direct materials costs to a specific job?

  1. The labor time ticket
  2. The predetermined overhead rate sheet
  3. The job cost sheet's summary column
  4. The materials requisition form Correct answer.

Explanation

A materials requisition form identifies the quantity and cost of materials issued to a particular job, so it is the source document for direct materials charges. Labor time tickets capture labor, and the job cost sheet accumulates all costs but is not the original source for materials.

Question 44Managerial Accounting and Cost Analysis

Which of the following costs is classified as a product cost for a manufacturing firm under absorption costing?

  1. Depreciation on the factory building Correct answer.
  2. Sales commissions paid to the sales force
  3. Interest expense on a construction loan
  4. Advertising expense for the period

Explanation

Under absorption costing, product costs include direct materials, direct labor, and both variable and fixed manufacturing overhead. Depreciation on the factory building is a manufacturing overhead cost and therefore a product cost.

Question 45Managerial Accounting and Cost Analysis

A company uses a standard costing system. Actual fixed overhead was $52,000, budgeted fixed overhead was $50,000, and applied fixed overhead was $48,000 based on standard hours. What is the fixed overhead budget (spending) variance?

  1. $4,000 unfavorable
  2. $2,000 unfavorable Correct answer.
  3. $2,000 favorable
  4. $4,000 favorable

Explanation

The fixed overhead budget variance is the difference between actual fixed overhead and budgeted fixed overhead: $52,000 − $50,000 = $2,000. Because actual exceeds budget, the variance is unfavorable.

Question 46Managerial Accounting and Cost Analysis

A process costing department has 1,000 units in ending work in process that are 40% complete as to conversion costs and 100% complete as to materials. Using the weighted-average method, how many equivalent units of conversion cost are in ending work in process?

  1. 600 equivalent units
  2. 1,000 equivalent units
  3. 40 equivalent units
  4. 400 equivalent units Correct answer.

Explanation

Equivalent units equal physical units multiplied by the percentage of completion for that cost element. For conversion costs: 1,000 units × 40% = 400 equivalent units.

Question 47Managerial Accounting and Cost Analysis

Which of the following best describes a key limitation of using a single plantwide overhead rate in a multi-product plant?

  1. It eliminates the need to track direct labor hours
  2. It cannot be computed before the accounting period begins
  3. It ignores the possibility that different products consume overhead resources in different proportions Correct answer.
  4. It requires actual overhead data before any job can be costed

Explanation

A plantwide rate assumes overhead is driven by one activity measure across all products. When products consume overhead differently, this assumption distorts product costs, which is why activity-based or departmental rates may be preferred.

Question 48Managerial Accounting and Cost Analysis

A company's contribution margin ratio is 40%, and fixed costs are $80,000. What level of sales dollars is required to earn a target operating income of $20,000?

  1. $250,000 Correct answer.
  2. $200,000
  3. $300,000
  4. $500,000

Explanation

Required sales = (fixed costs + target operating income) ÷ contribution margin ratio = ($80,000 + $20,000) ÷ 0.40 = $250,000. This gives the sales volume needed to cover fixed costs and produce the target profit.

Question 49Managerial Accounting and Cost Analysis

In a make-or-buy decision, which of the following costs is generally relevant to the decision?

  1. The avoidable variable cost of producing the part internally Correct answer.
  2. An allocated common fixed cost that will not change
  3. A committed fixed cost that continues regardless of the decision
  4. A sunk cost of equipment purchased last year

Explanation

Relevant costs are future costs that differ between alternatives. The avoidable variable cost of internal production disappears if the part is bought, so it is relevant to the make-or-buy comparison.

Question 50Managerial Accounting and Cost Analysis

A company uses the high-low method with the following data: at 10,000 units, total cost is $90,000; at 15,000 units, total cost is $120,000. What is the estimated variable cost per unit?

  1. $6.00 Correct answer.
  2. $8.00
  3. $12.00
  4. $9.00

Explanation

Variable cost per unit = change in total cost ÷ change in activity = ($120,000 − $90,000) ÷ (15,000 − 10,000) = $30,000 ÷ 5,000 = $6.00 per unit.