1. In business, a budget is a method for putting a limit on spending.

(a). True

(b). False

2. Which of the following would be an argument for the use of net book value in the computation of operating assets in return on investment calculations?

(a). It eliminates both age of equipment and method of depreciation as factors in ROI computations.

(b). It is consistent with how plant and equipment items are reported on the balance sheet.

(c). It allows the manager to replace old, worn-out equipment with a minimum adverse impact on ROI.

(d). It allows ROI to decrease over time as assets get older.

3. Under absorption costing, fixed manufacturing overhead costs:

(a). are ignored.

(b). are deferred in inventory when production exceeds sales.

(c). are always treated as period costs.

(d). are released from inventory when production exceeds sales.

4. Under absorption costing, fixed manufacturing overhead cost is not included in product cost.

(a). True

(b). False

5. Margin equals net operating income divided by sales.

(a). True

(b). False

6. The budget method that maintains a constant twelve-month planning horizon by adding a new month on the end as the current month is completed is called:

(a). a continuous budget.

(b). a capital budget.

(c). an operating budget.

(d). a master budget.

7. If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be higher in the company with a higher proportion of fixed expenses in its cost structure.

(a). True

(b). False

8. If Q equals the level of output, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the degree of operating leverage is equal to:

(a). F/[(P-V)/P].

(b). Q/(P-V).

(c). [(P-V)Q]/[(P-V)Q - F].

(d). F/(P-V).