A306 Chapter 1

Operating Leverage

Contribution Margin / Operating Income

Contribution Margin

Sales - Variable Costs

Differential cost is:

also known as incremental cost the difference in cost between two alternatives

How individual costs react to changes in activity level is referred to as cost BLANK

behavior

Fantastic Furniture makes custom order couches. The material used to make a couch is a(n) _______ cost of the customer placing the order.

direct

Within the relevant range of activity, ______ costs remain constant in total.

fixed

Break even point in units

fixed costs / contribution margin per unit

break even in dollars

fixed costs / contribution margin ratio

Factory costs such as cleaning supplies, taxes, insurance, and janitor wages are classified as ______.

manufacturing overhead

Indirect materials include ______.

nails, glue, and thread Reason: Relatively insignificant materials are treated as indirect because it isn't worth the effort to trace the costs.

Cost behavior:

refers to how a cost will change as activity level changes categorizes costs as fixed, mixed and variable

The level of activity within which variable and fixed cost assumptions are valid is known as the

relevant range

Costs that have already been incurred and can not be changed by decisions made in the current period or in future periods are called BLANK costs

sunk

What type of cost is never relevant and should be disregarded when making decisions?

sunk

An income statement focusing on product and period costs has been prepared using a(n) BLANK format, while a BLANK format income statement makes a distinction between fixed and variable costs

traditional contribution

Cost of goods sold for a merchandising company, direct materials and commissions are all examples of

variable costs

A company purchased a 12 month insurance policy on October 1 at a cost of $1,200. On the December 31 annual financial statements:

$300 is reported as a expense and $900 is reported as an asset

Which of the following are most likely fixed costs? Administrative salaries Factory rent Factory insurance Electricity to operate factory machines

Administrative salaries Factory rent Factory insurance

Contribution Margin Ratio

Contribution Margin / Sales

Which of the following statements are true? Period costs do not flow through the inventory accounts. All costs in a merchandising company are period costs. Period costs are expensed when incurred. Inventoriable costs are expensed in the period in which they are incurred.

Period costs do not flow through the inventory accounts. Period costs are expensed when incurred.

Margin of Safety in Dollars

Total Sales - Break Even Sales

Which of the following are differences between the traditional and contribution format to income statements?

Traditional income statements focus on cost classifications. Contribution format statements focus on cost behavior. Compared to traditional statements, contribution format statements provide management with a tool to make decision making easier.

Any item for which cost data is desired is called a(n)

cost object

Differential costs, opportunity costs and sunk costs are all cost classifications used in:

decision making

The difference in costs between two alternatives is called a(n) ______ cost.

differential

Costs that can be easily and conveniently traced to a specific product are called ______ costs.

direct

In an automobile manufacturing plant, the assembly-line workers are classified as BLANK costs

direct labor

Labor costs that can be easily and conveniently traced to specific products are ______ costs.

direct labor

A laptop computer manufacturer would consider the computer's processor chip to be a(n) ______ cost.

direct material

Materials that become an important component of the finished product whose cost can be easily and conveniently traced to the finished product are

direct materials

Manufacturing costs include

direct materials manufacturing overhead direct labor

Selling and administrative costs are _______ costs.

direct or indirect

A cost that can be easily and conveniently traced to a specific cost object is a(n) BLANK cost of that cost object, whereas costs that cannot be easily and conveniently traced to that specific cost object are BLANK costs

direct or prime indirect, common, or overhead

Administrative costs include:

executive compensation and public relations costs

Product costs flow through the inventory accounts until the goods are sold, at which time they are matched against sales on the:

income statement

Salaries of factory supervisors and factory maintenance personnel are examples of ______ labor costs.

indirect Reason: Only labor costs that can be physically and conveniently traced to individual units of product are considered direct labor costs.

A dress manufacturer would consider the cost of relatively inexpensive items like thread to be part of ______.

indirect materials manufacturing overhead

A manufacturing cost that cannot be easily traced to a specific cost object is a(n)

indirect, common, overhead, or shared

Product costs are also called BLANK costs

inventoriable costs

Indirect materials and indirect labor are classified as ______.

manufacturing overhead

Margin of Safety Percentage

margin of safety in dollars / total sales

The accrual concept that costs incurred to generate revenue are expensed in the same period the revenue is recognized is known as the

matching

There are two broad classifications of costs: manufacturing costs and BLANK costs.

nonmanufactoring

Nonmanufacturing costs include:

sales commissions company president's salary

contribution margin per unit

sales price per unit - variable cost per unit

contribution margin is

sales revenue minus variable costs

Selling costs include:

sales salaries sales commission advertising

Period costs are always expensed on the income statement in the period in which:

thy are incurred

A cost that changes in direct proportion to changes in the activity level is a ______ cost.

variable

Mixed costs are also commonly known as semi-BLANK costs

variable

cost objects include

customers organizational subunits anything for which cost data is desired

Sales revenue minus variable expenses equals

contribution margin

Direct materials and direct labor are both ______ costs.

manufacturing

There are two broad classifications of costs:

manufacturing and nonmanufactoring costs