Cost Accounting Test 2

Contribution margin can be used to...

Calculate the change in contribution margin for a change in sales volume

Degree of Operating Leverage

Contribution Margin / Net Operating Income

Division segment margin

Contribution margin - traceable fixed expenses

An asset in inventory under the variable costing method does not contain any ___________ _________ _________ costs.

fixed manufacturing overhead

When calculating the profit impact of discontinuing a segment, consider _____.

the segment's traceable fixed costs the segment's contribution margin

A company's 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 ______.

(26,000 - 17000) * $22

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ______.

(735,000 - 700,000) * .45 - 8000

Profit Equation

(CM Ratio x Sales) - Fixed Expenses

Profit equals ______.

(P × Q) - (V × Q) - fixed expenses

Net operating income equals ______.

(unit sales - unit sales to break even) × unit contribution margin

Two Methods for Calculating Departmental Unit Costs

-FIFO -Weighted Average

When preparing a segment margin income statement ______.

-cost of goods sold consists of only variable manufacturing costs -traceable fixed expenses are deducted from contribution margin

A company with a high ratio of fixed costs ______.

-is more likely to experience a loss when sales are down than a company with mostly variable costs -is more likely to experience greater profits when sales are up than a company with mostly variable costs.

Alternate Variable Expense Ratio

1 - Contribution Margin

Alternate Contribution Margin Ratio Calculation

1 - Variable Expense Ratio

Advantages of Variable Costing

1. Income Statement is Contribution approach, allows for better CVP analysis 2. Explain the changes in NOI 3. Better for decision making

Steps to Graph a CVP

1. Plot the fixed expense line 2. Plot the total expense line (fixed + variable) 3. Plot the sales (0 to the amount of sales)

CVP analysis focuses on how profits are affected by:

1. Selling prices 2. Sales Volume 3. Unit Variation Costs 4. Total Fixed Costs 5. Mix of products sold

Processing Departments

Any unit in an organization where materials, labor, or overhead are added to the product.

Break Even Sales Equation Method

CM Ratio x Sales - Fixed Expenses

A company has three processing departments: Mixing, Baking, and Packaging. The Baking Department transfers 500 units to the Packaging Department. How will the Packaging Department account for the costs of those 500 units?

Costs transferred in

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.

Decrease

Conversion Costs

Direct Labor + Manufacturing Overhead

To find Fixed Manufacturing Cost per month

Divide the fixed manufacturing cost by the number of units PRODUCED in the period. Add this to the other costs to get a total cost per month

T/F: Process costing is used when a company produces a continuous flow of units that are distinguishable from one another.

False, indistinguishable

Break Even Sales Formula Method

Fixed Expenses / CM Ratio

What is usually plotted as a horizontal line on the CVP graph?

Fixed expenses

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

Under the variable costing system, fixed manufacturing overhead goes to the _________ ________.

Income statement (as a period cost)

Break Even per unit Equation Method

Profit = Unit CM x Q - Fixed Expenses *plug 0 in for profit

Break Even Analysis for Segment of Company

Traceable fixed expense / CM Ratio

Break Even Analysis for Total Company

Traceable fixed expenses + Common fixed expenses / CM Ratio

T/F: Process costing assigns departmental costs uniformly to all identical units that pass through the department during a period.

True

Cost structure refers to the relative portion of ________ and _________ costs in an organization.

fixed, variable

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

greater than -absorption costing includes the fixed MOH in product costs, so they are expensed as sold

Variable costing methods are mainly used for ____________ reporting.

internal

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

less than -variable costing puts fixed MOH straight on the income statement. If there is more sitting in inventory then we haven't expensed it yet

Margin of Safety Percentage

margin of safety in dollars / total budgeted (or actual) sales in dollars

Equivalent Units Calculation

number of partially completed units x percentage completion

For a cost reconciliation report, the cost of inputs needs to be equal to the cost of _________.

outputs

In absorption costing all manufacturing costs are treated as ____________ costs.

product

When preparing a CVP graph, the horizontal axis represents ______.

sales volume

Margin of safety

the excess of budgeted or actual dollar sales over the break-even dollar sales, essentially how much a company could lose before it starts taking losses

break-even point

the point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero

The cost of beginning work in process inventory plus the costs added to production during the period equals the _______.

total costs to be accounted for

The break-even point is reached when the contribution margin is equal to ______.

total fixed expenses

Break-even point is the level of sales at which ______.

total revenues equal total costs

Break Even per Unit Formula Method

unit sales to break even = fixed expenses / unit CM

Absorption costing income statements ignore ________.

variable and fixed cost distinctions

Which of the following costing approaches is best suited for cost-volume-profit analysis?

variable costing

Variable Expense Ratio

variable expenses/sales

Operation Costing

A hybrid costing system used when products have some common characteristics and some individual characteristics. Involves elements of process costing and job-order costing.

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

Fixed/Variable Selling and admin costs are always _________ costs.

period

The current sales of Trent, Incorporated, are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Incorporated?

60%

Change in Contribution Margin

CM ratio x change in sales

Contribution Margin Ratio

Contribution Margin / Sales - can be overall or per unit

Margin of Safety in Units

Margin of Safety in Dollars / Selling Price

Contribution margin equals ________.

Sales - Variable Costs

T/F: Each department in a process costing system has its own Work In Progress account.

True

After reaching the break-even point, a company's net operating income will increase by the __________ _______ for each additional unit sold.

contribution margin

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

contribution margin

The division segment margin is the best gauge of the...

Long Run Profitability of a Segment -only includes costs incurred by the segment NOT the whole company (common costs)

The measure of how sensitive net operating income is to a given percentage change in volume sales is called _______.

Operating Leverage

Sneaker Styles Company manufactures a wide variety of sneakers. Which of the following systems is most suitable for Sneaker Styles?

Operation Costing

Assigning common fixed costs to segments impacts ______.

Segment margin only

When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by units ______.

produced

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

equal to

Profit Equation

Unit Contribution Margin x Quantity - Fixed Expenses

What is represented on the X axis of a cost-volume-profit (CVP) graph?

Unit volume

Equivalent Units of Production Calculation

Units transferred to next department + Equivalent Units in Ending WIP Inventory

We use process costing when...

a continuous flow of indistinguishable items are produced

Under variable costing, fixed manufacturing overhead is:

a period cost, NOT a product cost

Financial statement users need to be aware of changes in inventory levels when using __________ costing.

absorption

Under absorption costing, fixed manufacturing over head goes on the _______ ________.

balance sheet -WIP and subsequently to Finished Goods and COGS

Contribution margin ______.

becomes profit after fixed expenses are covered

With regards to interpretation, what are the important areas that appear on a CVP graph?

break even point, loss area, profit area

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______.

change in sales dollars × contribution margin ratio

Why is CVP analysis more difficult when using absorption costing than when using variable costing?

CVP analysis requires costs to be broken down between variable and fixed which is not done in absorption costing.

Costs to be accounted for need to be equal to

costs accounted for

Contribution margin is the amount needed to...

cover fixed expenses and provide profits for Net Operating Income

The segment margin represents the margin available after a segment has...

covered its own costs (traceable fixed costs)

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______.

decrease in unit variable cost

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage?

3

Cost per equivalent unit calculation

Cost of beginning WIP + Cost added during period / Equivalent units of production

Transferred In Costs

Costs incurred in a previous process that are carried forward as part of the product's cost when it moves to the next process.

Variable Costing Unit Product Cost

direct materials + direct labor + variable manufacturing overhead

Operating Leverage Formula

Contribution Margin / Net Operating Income

T/F: A processing department needs to calculate a separate unit cost for each type of cost incurred.

True

T/F: Process costing accumulates costs by department.

True

T/F: Process costing systems compute unit costs by department.

True

Under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost is allocated to each unit produced, rather than being expensed as one large sum.

True