ACCT - SMARTBOOK #5

The format used to prepare a contribution income statement is Sales - ______.

Variable expenses = Contribution margin - Fixed expenses = Net income

Step-fixed costs ______.

are fixed over a fairly wide range of activity

Step costs ______.

are fixed over some range of activity may be either step-fixed or step-variable

Nonmanufacturing costs are reported as inventory when using full absorption costing.

false

True or false: Absorption costing and variable costing always result in the same net operating income for the year.

false

Variable costing ______.

focuses on contribution margin instead of gross margin

A variable costing income statement ______.

focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs calculates contribution margin, while the absorption costing income statement calculates gross margin

In the equation Y = a + bX, a denotes the ______.

intercept total fixed cost

The best fitting line minimizes the sum of the squared errors when using ______.

least-square regression

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called ______.

least-squares regression

When using ______, proper interpretation of the results is critical.

least-squares regression

Differences in profit between absorption and variable costing can occur in ______.

manufacturing companies only

When inventory decreases, cost of goods sold under absorption costing will be ______ cost of goods sold under variable costing.

more than

Nonmanufacturing costs are ______.

never reported as inventory

The high-low method ______.

only uses two data points calculates the line based on the most extreme activity data points provides a reasonable estimate as long as the data points are within the relevant range

A visual representation of the relationship between cost and activity is provided by a(n)

scattergraph

A limitation of ______ is that it is (they are) subjective and inexact.

scattergraphs

A useful first step in analyzing cost behavior is to prepare a(n) __________ because it helps determine the nature of the relationship and whether the linearity assumption is valid.

scatterplot

To answer preliminary questions such as whether the linearity assumption is valid, accountants use a(n)

scatterplot/scattergraph

Mixed costs are also commonly known as ________ costs.

semivariable

Costs that have a fairly narrow range and rise in multiple steps across the relevant range are called

step-variable costs

The unit contribution margin ______.

tells how much each additional unit contributes to profit

A simple approach that uses the two most extreme activity observations is ______.

the high-low method

Assume that a company sells 5,000 units each month, at a price of $50 per unit. If the company computes net operating income using variable costing, the net income will be ______.

the same every month

When the number of units produced equals the number of units sold, net income will be ______.

the same under both absorption costing and variable costing

In the equation Y= a + bX, Y is the ______.

total cost

True or false: When using the high-low method, fixed costs are calculated after variable costs are determined.

true

Managers sometimes have an incentive to overproduce when using full __________ costing

absorption

When inventory increases, the ______ costing method generally results in higher net operating income.

absorption

When the number of units produced equals the number of units sold, ______.

absorption costing net income is equal to variable costing net income all fixed overhead incurred flows to the income statement under both costing methods

Using the high-low method, the fixed cost is calculated ______.

after the variable cost per unit is calculated using either the high or low level of activity

Using the high-low method, a company calculated the variable cost as $1.75 per unit. The high level of activity was 5,000 units and $10,000 of total cost. Total fixed costs equals $

$1,250

Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal ______.

$101,000 Reason: $42,000 + $59,000 = $101,000

Comfy Cozy Chairs makes and sells rockers. Each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead is $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs equal $15 per unit, and fixed selling and administrative costs total $102,000. During the period, 2,000 rockers were produced and 1,640 were sold. The unit product cost using absorption costing is ______.

$119 Reason: $45 + $37 + $8 + ($58,000/2,000) = $119

The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total variable cost reported on Quaint Quilt's variable costing income statement is ______.

$124,020 Reason: ($140 + $19) × 780 quilts sold = $124,020

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $27/unit Fixed manufacturing overhead: $30,000 Units produced: 10,000 Units sold: 6,000

$155 Reason: $50 + $75 + $27 + ($30,000/10,000) = $155 per unit

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing reports $

$28,990

Given: Calculated variable cost per unit of $1.40 High level of activity: 2,500 units and $5,300 total cost The low level of activity was 1,000 units. Total cost at the low level of activity equals ______.

$3,200 Reason: $5,300 - ($1.40 × 2,500) = $1,800 of fixed costs. $1,800 + (1,000 x $1.40) = $3,200 of total cost at the low level of activity.

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit and fixed manufacturing overhead cost is $19,000 in total. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. Last period, 800 gloves were produced, and 585 gloves were sold. The unit product cost using variable costing is ______ per unit.

$47 Reason: Unit product cost = $22 + $18 + $7 = $47. Selling and administrative costs are never considered part of product cost.

Pearls, Pearls, Pearls! manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is $

$79,398

JVL Inc. sells its only product for $10 per unit. Variable costs are $4 per unit and total fixed costs are $40,000. The company is currently selling 10,000 units per year. By how much will profits increase if sales increase 1,500 units?

$9,000 Reason: ($10 - $4) = $6 CM × 1,500 units = $9,000.

Contrast the way fixed manufacturing overhead costs are treated in absorption costing versus variable costing. Instructions Absorption Costing Variable costing

- Fixed manufacturing overhead is treated as part of the per-unit product cost and expensed as units are sold. -Fixed manufacturing overhead is treated as a period cost and expensed in full each period.

Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced, and variable selling and administrative expense is $13 per frame sold. The company produces 5,000 units each month and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is $

68

Which of the following statements are true?

Both the total cost and the per-unit cost of mixed costs change with changes in the level of activity. The equation for a straight line can be used to express the relationship between mixed costs and the level of activity. Mixed costs contain both fixed and variable cost elements.

Why is it important to analyze mixed costs?

Managers need to know how much of a cost is variable and how much is fixed. To make decisions, managers need to know how costs change.

Which of the following statements are true?

Scattergraphs are a way to diagnose cost behavior. Scattergraphs are used to help determine if the linear assumption is reasonable.

Which of the following may not represent the general trend in the data?

The high-low method

Full absorption costing can have a different bottom line (profit) than variable costing because of ______.

changes in inventory levels

The financial statement that organizes costs by their behavior instead of by their function is the ______.

contribution margin income statement

How much contribution margin is generated by every dollar of sales is shown by the ______.

contribution margin ratio

Net operating income is less under absorption costing than under variable costing when inventory for the period ______.

decreases

The formula to calculate the variable cost per unit using the high-low method is ______.

difference in total cost divided by difference in activity

Managers may have an incentive to overproduce in order to increase profits when using ______ costing.

full absorption

A simple approach that uses the two most extreme activity observations is the ______________- ________________

high- low method

Net operating income under absorption costing is generally ______ net operating income under variable costing in periods in which inventory increases.

higher than

Assume that a company sells 5,000 units each month, at a price of $50 per unit. If the company computes net operating income using absorption costing, the net income will be ______.

highest when units produced exceeds units sold

A fixed cost remains fixed ______ within the relevant range of activity.

in total

Contribution margin ratio is ______.

unit contribution margin ÷ unit sales price

For internal decision making, it is best to use ______ costing.

variable

When using the high-low method, the slope of the line equals the _____________ cost per unit of activity.

variable

The high-low method may provide a reasonable estimate of fixed and variable costs as long as the high and low data points fall ______ the relevant range.

within