managerial accounting test 2
variable costing income
is only affected by changes in unit sales. It is not affected by the number of units produced. - as a general rule, when sales go up, net operating income goes up and vice versa
once a company prepares a contribution format segmented income statement
it can use the statement to make decisions and perform break even analysis
the ______________________ is the excess budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred.
margin of safety
_________________________ is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits
operating leverage
the measure of how sensitive net operating income is to a given percentage change in dollar sales is called
operating leverage
the relationship between profit and the CM ratio can be expressed using the following equation:
profit = (CM ratio x Sales) - fixed expenses
the contribution format income statement can be expressed in the following equation:
profit = (sales - variable expenses) - fixed expenses
we can calculate break even by solving the equation:
profit = unit CM x Q - fixed expenses
contribution margin equals
sales minus variable costs
a _____________ is any part of activity of an organization about which a manager seeks cost, revenue, or profit data ex: individual store, sales territory, service center
segment
in ______________, we estimate what sales volume is needed to achieve a specific target profit
target profit analysis
contribution margin is
the amount remaining from sales revenue after variable expenses have been deducted
segment margin is
the best gauge of the long run profitability of a segment
the higher the margin of safety,
the lower the risk of not breaking even and incurring a loss
which of the following statements about the segment margin is not true?
the segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin
which of the following costing approaches is best suited for cost volume profit analysis
variable
which of the following costing approaches is best suited for cost-volume profit analysis?
variable
absorption costing income statements ignore
variable and fixed cost distinctions
variable costing categorizes costs as
variable and fixed so it is much easier to use this income statement format for CVP analysis
_______________ correctly identifies the additional variable costs incurred to make one more unit. It also emphasizes the impact of total fixed costs on profits
variable costing
sales mix
The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
how can the relationships among revenue, cost, profit, and volume be expressed
graphically, by preparing a CVP graph
When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________.
less than absorption costing net operating income
companies with ____ fixed cost structures enjoy greater stability in income across good and bad years
low
commissions based on sales dollars can lead to
lower profits in a company
if a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break even point in units will:
not change
which of the following statements about the segment margin is not true
the segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin
t/f: the contribution margin income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior.
true
t/f: traceable fixed costs of one segment may be common fixed cost of another segment
true
Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.
unit contribution margin
under _______________, only the variable production costs are included in the product costs
variable costing
costs assigned to a segment should include
all costs attributable to that segment from the company's entire value chain
t/f: the smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses
false
Advantage of high fixed cost structure
income will be higher in good years compared to companies with lower proportion of fixed costs
the profit graph is based on the following linear equation:
profit= unit cm x Q - fixed expenses
what is usually plotted as a horizontal line on the CVP graph?
fixed expenses
there are two 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
inappropriate methods of allocating costs among segments
1. failure to trace costs directly: costs that can be traced directly to specific segments of a company should not be allocated to other segments 2. inappropriate allocation base: some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments only when the allocation base actually drivers the cost being allocated
To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:
1. selling price is constant. The price of the product or service will not change as volume changes 2. costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. in multi product companies, the mix of products sold remains constant.
Variable vs. Absorption Costing
ABSORPTION COSTING- fixed manufacturing costs must be assigned to products to properly match revenues and costs VARIABLE COSTING- fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced
segment margin equation
Contribution Margin - Traceable fixed costs
_____________________ require publicly traded companies to include segmented financial data in their annual reports - helps avoid the contribution approach when it comes to internal reporting
GAAP and IFRS
absorption costing income
Influenced by changes in unit sales and units of production. Net operating income can be increased simply by producing more units even if those units are not sold.
under ________________, all production costs, variable and fixed, are included when determining unit product cost
absorption costing
Contribution Format Income Statement
Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income
traceable fixed costs
arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared
common fixed costs
arise because of the overall operation of the company and would not disappear if any particular segment were eliminated
what is used first to cover fixed expenses?
contribution margin - any remaining CM contributes to net operating income
moss feet shoe corporation is a single product firm. The company is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for the next year?
contribution margin ratio: increase break-even point: decrease
___________________ refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure
cost structure
break even point is the level of sales at which
total revenue equals total costs
what is represented on the X-axis of a cost volume profit (CVP) graph?
unit volume
Disadvantage of high fixed cost structure
income will be lower in bad years compared to companies with lower proportion of fixed costs
what are some examples of common fixed costs?
1. the salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors 2. The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the various departments
what are some examples of traceable fixed costs?
1. the salary of the Fritos product manager at Pepsi Co is a traceable fixed cost of the Fritos business segment of Pepsi Co 2. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing
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 manager to be held accountable for costs they cannot control
when a company sells more than one product,
break even analysis becomes more complex
with regards to interpretation, what are the important areas that appear on a CVP graph?
break-even point, loss area, and profit area
the difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for
fixed overhead costs