managerial accounting ch 5, 5A, 6

advocates of absorption costing believe that

fixed costs are an essential part of product production

absorption and variable costing net income are usually different due to the accounting for

fixed manufacturing overhead

under variable costing the cost of a unit or inventory does NOT contain

fixed manufacturing overhead

a traceable fixed cost

is incurred because of the existence of a segment

when a segment cannot cover its own costs

it should probably be dropped

the segment margin is a valuable tool for assessing the:

long run profitability of a segment

allocating common fixed costs to a segment

may cause an otherwise profitable segment to appear unprofitable

to estimate the effect on profits for a planned increase in sales

multiply the increase in units sold by the unit cm

to calculate the degree of leverage

net operating income/cm

costs should be allocated to segments for internal decision-making purposes

only when the allocation base actually drives the cost being allocated

a measure of how sensitive net operating income is to a given percentage change in sales dollars is known as

operating leverage

under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as

period costs

Chrissy's cupcakes has $832,000 in sales and $265,000 in fixed expenses. given cm ratio of 72% Chrissy's profit loss is

profit= cm x sales - fe 72% x 832,000 - 265,000 = 334,040

the single point where the total revenue line crosses the total expense line on the CVP graph indicates

the break even point, profit equals zero

a company has reached its break even point when

the cm equals fixed expenses

the amount of by which sales can drop before losses are incurred

the margin of safety

the break even point is reached when the contribution margin is equal to:

total fixed expenses

company A has a cm ratio of 35% for each dollar in sales the cm will increase by

$.35

a company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. if the break-even point is 200 units and the company sells 201 units net profit will be:

$100- for each unit sold above break even, profit increases by the contribution margin per unit which is ($100,000-$80,000)/200

company A's product sells for $90 and has a variable cost of $35 per unit. fixed costs total $550,000. if company A sells 16,000 units the CM per unit is

$90-$35=$55

given sales of $1,452,000, variable expenses of $958,000 and fixed expenses of $354,000 the cm ratio is

(1,452,000-958,320)/1,452,000= 34%

a company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. the number of unit sales needed to earn a target profit of $200,800 is

(320,000+200,800)/(90-28)= 8,400 units

run like the wind sells ceiling fans. target profit for the year is $470,000. if each fan's cm is $32 and fixed costs total $222,640, the number of fans required to meet the company goal is

(470,000+222,640)/32= 21,645 fans

blissful blankets target profit is $520,000. each blanket has a cm of $21. fixed costs are $320,000. the number of blankets blissful blankets needs to sell in order to achieve its target profit is:

(520,000+320,000)/21= 40,000 blankets

when a segment is eliminated

-a traceable fixed cost will disappear -common fixed costs will remain unchanged

scattergraphs

-a way to diagnose cost behavior -plotting data on a scattergraph is an important diagnostic step

advocates of variable costing believe fixed manufacturing costing

-are period expenses - are not caused by and cannot be meaningfully traced to specific units of production

Assumptions of Cost-Volume-Profit Analysis

-costs are linear and can be accurately divided into variable and fixed elements - in multi product companies, the sales mix is constant

a segment should be discontinued when

-it cannot cover its own costs -it has a CM that cannot cover traceable fixed costs

at the break-even point

-net operating income is zero -total revenue equals total cost

Terry's trees has reached its break even point and has calculated its cm ratio to be 70%. for each $1 increase

-net operating income will increase by $.70 -total cm will increase by $.70

common miscues made by companies when assigning costs to segments include:

-omit some costs -inappropriately assign traceable fixed costs -arbitrarily allocate common fixed costs

company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. company A has:

-reached break-even point -a contribution margin equal to fixed costs

income statements prepared under variable and absorption costing

-reported net income on statements differ -both income statements include product and period costs

GAAP and IFRS rules

-require the the same method be used for both internal and external segment reporting - require segmented financial data be included in annual reports -create problems in reconciling internal and external reports

Petes putters sells each putter for $125. the variable cost is $60 per putter and fixed costs total $400,000. based on this information:

-the contribution per putter is $65 -the sale of 12,000 putters results in net operating income of $380,000 12,000x $65 cm= 780,000-400,000=380,000

the profit graph allows users to easily identify

-the profit at any given sales volume. -the sales volume required to reach the break-even point

absorption costing is

-used by most companies for external and internal reports -required by GAAP and IFRS

order of CM formal income statement

1) sales 2) variable expenses 3) cm 4) fixed expenses 5) net operating income

cakes by Jackie has $144,000 of fixed costs per year. the cm ratio is 59%. the sales dollars to break-even rounded to the nearest dollar equals

144,000/59%= 244,068

Vivian's violins has sales of $326,000, CM of $184,000 and fixed costs total $85,000. Vivian's violins net operating income is

184,000-85,000 = 99,000

company A sold 200,000 units. selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. company A's profit (loss) is:

200,000x4-632,000 = 168,000

majorie's mugs sold 300 mugs last year for $20 each. variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's mugs' profit was

300x20=6,000 300x7=2,100 3,900-1700= 2200

a company has a target profit of $204,000. the company's fixed costs are $305,000. the cm per unit is $40, what is the break even point in sales

305,000/40= 7,625

company A sells its product for $10 per unit if company A has variable expenses of $5 per unit and fixed expenses of 200,000, the break even point in units and dollars is

40,000 units and 400,000 dollars $200,000/5=40,000 40,000 x $10 = 400,000

Shonda's shoes sell for $95 per pair. if Shonda must sell a total of 284 pairs of shoes to break even , and a total of 450 pairs to achieve her target profit, sales dollars need to earn the target profit equals

450 x 95 = 42,750

plush and cushy sells high end desk chairs. the variable expense per chair is $85.05 and the chairs sell for $189 each. the variable expense ratio is

85.05/189= .45

a companys break-even point is 17,000 units. if the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be

9,000x22=198,000

lance inc. has sales of 9,000 units the cm is $32 and fixed costs total $120,000 lance's profit is

9,000x32=288,000-120,000= $168,000

sniffles inc produces facial tissues the company's cm ratio is 77% fixed expenses are $240,000. to achieve a target profit of $930,000 sniffles sales rounded to the nearest dollar must be:

930,000 + 240,000/ .77 = $1,520,000

if a segment is entirely eliminated

a fixed cost will not change

if the total cm is less than the total fixed expenses then

a net loss will occur

High-low or least squares regression analysis should only be done if

a scattergraph plot predicts linear cost behavior

cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

selling and administrative expenses

are always treated as period costs

under absorption costing product costs consist of

both variable and fixed manufacturing costs

the calculation of CM ratio is

cm/sales

when constructing a CVP graph, the vertical axis represents:

dollars

a company with 3 segments has $10,000 in common fixed expenses. all 3 segments are at the break-even point. as a result the company

has an overall net operating loss of $10,000

the cm statement is primarily used for

internal decision making

the CM equals

sales minus all variable costs

to convert the margin of safety in dollars to the margin of Saftey in term of the number of units sold divide the margin of safety in dollars by the

sales price per unit

the cm income statement allows users to easily judge the impact of a change in

selling price, cost, volume

CVP analysis focuses on how profits are affected by

selling prices, sales volume, unit variable costs, total fixed costs, mix of products sold

to convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even

set the target profit to 0

costs that can be directly traced to a segment

should not be allocated to other segments

arbot co. manufactures appliances at 3 manufacturing facilities in the US. each location has a plant manager who oversees the manufacturing process for that location. segmented income statements are prepared for each plant. the salary of each plant manager is a:

traceable fixed cost to the plant and a common fixed cost for the individual product lines made in the plant

the two general costing approaches used by manufacturing companies to prepare income statements are

variable costing and absorption costing