Accounting Exam 2 Concepts
Variable Costing Benefits
- correctly identifies the additional variable costs incurred to make one more unit - it also emphasizes the impact of total fixed costs on profits
CM: Do we need to prepare an income statement to estimate profits at a particular sales volume?
No, we simply multiply the number of units sold above break-even by the CM per unit.
Transaction Driver
Number of times an activity occurs
Target Profit Analysis Equation Method: What does Q stand for?
Our goal is to solve for the unknown "Q" which represents the quantity of units that must be sold to attain the target profit.
Variable Costing: What falls under product and period?
Product: DM, DL, VMOH Period: FMOH, V selling, F selling
Absorption Costing: What falls under product and period?
Product: DM, DL, VMOH, FMOH Period: V selling, F selling
Operating Leverage
a measure of how sensitive NOI is to percentage changes in sales
ABC defines ______ levels of activity that largely do not relate to the volume of units produced.
five
CM is used first to cover ________ expenses. Any remaining CM contributes to ______.
fixed NOI
The traditional cost system overcosts _____ volume products and reports a _________ product margin for these product.
high lower
A customer margin tells us _______________ we are making from that particular customer
how much profit
Absorption Costing: Managers may __________ production to _________ unwarranted inventory to maximize income and therefore their own bonus.
increase build up
A product margin tells us how ___________ a particular product is.
profitable
Unit Cost Computations: Since the variable costs per unit, total fixed costs, and the number of units produced remained unchanged, the __________________ also remain unchanged.
unit cost computations
Variable costing net operating income: - is only affected by changes in _______ - is not affected by the number of units _________ - As a general rule, when sales go _______, net operating income goes up, and vice versa.
unit sales produced up
Absorption costing income: - is influenced by changes in _______ - is influenced by units of ________. - NOI can be increased simply by producing _____ units even if those units are not sold.
unit sales production more
Absorption costing income statements ignore ________. direct materials and direct labor costs direct and indirect cost distinctions product and period cost distinctions variable and fixed cost distinctions
variable and fixed cost distinctions
Traditional cost systems rely exclusively on allocation bases that are driven by the __________ of ___________.
volume of production
Because absorption costing assigns fixed manufacturing overhead costs to units produced,
- it gives the impression that fixed manufacturing overhead is variable with respect to the number of units produced, but it is not. - The result can be inappropriate pricing decisions and product discontinuation decisions.
The contribution income statement helps managers calculate the impact on profits when there are changes in:
- selling price - cost - volume. The emphasis is on cost behavior.
2 keys to building segmented income statements
1. A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin 2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.
Traditional Income Statement v. Contribution IS 1. Used primarily by management. 2. Used primarily for external reporting.
1. Contribution 2. Traditional
Five steps for implementing activity based costing
1. Define activities, activity cost pools, and activity measures (cost driver). 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects using the activity rates and activity measures. 5. Prepare management reports (product report and customer report).
Units produced < units sold: 1. What is effect on inventory? 2. What is relation between variable and absorption incomes?
1. Inventory decreases 2. Absorption < Variable
Units produced > units sold: 1. What is effect on inventory? 2. What is relation between variable and absorption incomes?
1. Inventory increases 2. Absorption > Variable
Units produced = units sold: 1. What is effect on inventory? 2. What is relation between variable and absorption incomes?
1. No change in inventory 2. Absorption = Variable
5 Limitations of ABC:
1. Substantial resources required to implement and maintain. 2. Resistance to unfamiliar numbers and reports. 3. Desire to fully allocate all manufacturing costs to products. 4. Potential misinterpretation of unfamiliar numbers. 5. Does not conform to GAAP. Two costing systems may be needed.
Common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" for two reasons:
1. This practice may make a profitable business segment appear to be unprofitable. 2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control.
Manufacturing companies typically combine into what 5 classifications:
1. Unit level activity 2. Batch level activity 3. Product level activity 4. Organization Sustaining Activity 5. Customer Level Activity
Costs deferred: Units Produced _ Units Sold Costs released: Units Produced _ Units Sold
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ABC: Activity Cost Pool
A "cost bucket" in which costs related to a single activity measure(cost driver) are accumulated.
_________________ costing also uses non-volume related allocation bases.
ABC
_____________________ costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products.
ABC
_______________costing only assigns manufacturing overhead costs consumed by products to those products.
ABC
ABC: Activity
An event that causes the consumption of overhead resources.
The break even point is where you sell just enough units to cover _________________?
FE
The only difference between variable costing and absorption costing lies in the treatment of:
FMOH
Operating leverage is a measure of how sensitive ________ is to percentage changes in _______.
NOI sales
_____ is the measure of goodness of fit in least-squares regression.
R2
Which of the following is a common mistake made by companies when assigning costs to segments? They use allocation bases that drive the costs when assigning costs to segments. They trace fixed expenses to segments when it is feasible to do so. They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs. They include "upstream" and "downstream" costs when preparing profitability analyses that relate to individual product costs.
They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.
______________ costing allocates all manufacturing overhead costs using a volume-related allocation base.
Traditional
__________________ disregards selling and administrative expenses because they are assumed to be period expenses.
Traditional
________________costing allocates all manufacturing overhead to products.
Traditional
What are the two common types of activity measures?
Transaction Driver and Duration Driver
Which of the following costing approaches is best suited for cost-volume-profit analysis? Absorption Normal Standard Variable
Variable
CVP: The variable costs are constant _________ and the fixed costs are constant in_____ over the entire relevant range.
per unit total
Job order costing and process costing used the _________ ___________ method.
absorption costing
Under absorption costing,______________ , are included when determining unit product cost.
all production costs, variable and fixed
Duration Driver
amount of time needed or an activity
Segment
any part or activity of an organization about which a manager seeks cost, revenue, or profit data
Activity Cost Pool: Customer Relations
assigned all costs associated with maintaining relations with customers
Activity Cost Pool: Order Size
assigned all costs of resources consumed as a consequence of the number of units produced
Activity Cost Pool: Design Changes
assigned all costs of resources consumed by customer requested design changes
Activity Cost Pool: Customer Orders
assigned all costs of resources that are consumed by taking and processing customer orders
Activity Cost Pool: Other
assigned all organization-sustaining costs and unused capacity costs
Why do traceable fixed costs arise?
because of the existence of a particular segment and would disappear over time if the segment itself disappeared
Why do common fixed costs arise?
because of the overall operation of the company and would not disappear if any particular segment were eliminated
ABC differs from traditional cost accounting: Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a _____________ basis.
cause and effect
CVP: Selling price per unit is _______.
constant The price of a product or service will not change as volume changes.
In the first-stage allocation of overhead costs, products, customer orders and customers are examples of ________.
cost objects
Which of the following is not a management report that is normally prepared with ABC data? Product profitability Customer margins Customer profitability
customer margins
A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.
decrease
NOI is higher under absorption costing because FMOH cost is _________ in inventory under absorption costing as inventories increase.
deferred
Traditional cost systems usually rely on _________ hours and/or machine hours to allocate all overhead costs to products.
direct labor
ABC: Relying exclusively on ______________ and/or machine hours to assign overhead costs to products has come under increased scrutiny in today's manufacturing environment.
direct labor hours
The Margin of Safety can be expressed in _________, ___________, and ___________.
dollars percentage units
Direct labor and machine hours work correctly when they are _____________ costs.
driving
Break-Even Analysis: The ________ and ________ methods can be used to determine the unit sales and _______ sales needed to achieve a target profit of _______.
equation formula dollar zero
Because on an economy-wide basis: the variety of products produced by companies has ______________ the complexity of overhead costs
increased
All of the following are levels of activity that ABC uses except ________. product level batch level industry level customer level
industry level
The segment margin is the best gauge of the ____________________ of a segment
long-run profitability
The traditional cost system undercosts _____ volume products and reports a __________ product margin for these product.
low higher
The higher the margin of safety, the _______ the risk of not breaking even and incurring a ________.
lower loss
Segments: Once a company prepares a contribution format IS, it can use this statement to __________.
make decisions and perform break-even analysis
ABC differs from traditional cost accounting: ABC does not assign ALL ______________ costs to products
manufacturing
ABC differs from traditional cost accounting: Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique ___________________________ (cost driver).
measure of activity
CVP: In _____________ companies, the mix of products sold remains constant.
multiproduct
The use of absorption costing for segmented income statements results in ________. omission of upstream and downstream costs failure to trace costs directly inappropriate use of allocation base arbitrary division of common costs among segments
omission of upstream and downstream costs
Under variable costing, _____________ are included in product costs.
only the variable production costs
Because on an economy-wide basis: direct labor and overhead costs have been moving in ____________ direction
opposite
Sales, variable expenses, and CM can also be expressed on a ____________ basis.
per unit
NOI is lower under absorption costing because FMOH cost is _________ in inventory under absorption costing as inventories decrease.
released
Contribution Margin(CM)
the amount remaining from sales revenue after variable expenses have been deducted
Segments: Fixed expenses that are traceable to one segment can become common fixed expenses if _________.
the company is divided into smaller segments
Margin of Safety
the excess of budgeted or actual sales dollars over the break-even volume of sales dollars the amount by which sales can drop before losses are incurred
Segments: Common fixed expenses should not be allocated to __________________.
the individual divisions
Break-even point is the level of sales at which ______. total profits equals total costs total profits exceed total costs total revenue equals total costs total sales equal total projections
total revenue equals total costs