ACC 212- CHAPTER 5

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 x 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.

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.

full absorption costing

- assigns all manufacturing costs to products - is required for external reporting

Baker's contribution margin ratio is 60%, which means that a $7,000 increase in sales will result in a $___________ increase in net operating income

4200

Webster, LLC sells its product for $20 per unit. Variable costs are $11 per unit and total fixed costs are $35,000. The company sells 8,000 units per year. Webster's contribution margin ratio is..?

45% Reason: $9 CM/$20 sales price

when the product is sold, the full cost of manufacturing the product is reported as...

COGS (external reporting approach- full absorption costing)

contribution margin ratio=

Unit Contribution Margin / Unit Selling Price

The formula to calculate the variable cost per unit using the high-low method is ______. a) difference in total cost divided by difference in activity b) difference in activity divided by difference in total cost c) total cost minus total fixed cost d) y = a + bX

a

The high-low method ______. a) may produce inaccurate results b) is easy to apply c) always uses data points that represent normal levels of activity d) is preferable to least-squares regression

a & b

Fixed costs ______. a) should not be expressed on a per unit basis when making decisions b) remain constant in total within the relevant range of activity c) generally include rent and supervisor salaries d) per unit become progressively larger as the level of activity increases

a, b, c

Fixed costs should not be expressed on a per-unit basis because ______. a) putting fixed costs on a per-unit basis makes products look like they cost more to produce than they really do b) it may make managers believe they can reduce costs by producing more c) the average cost per unit decreases as more units are made

b

Mixed costs ______. a) are the same as step costs b) change both in total and per unit as activity changes c) cannot be analyzed using scattergraphs d) have a fixed component that is based on activity

b

Step-fixed costs ______. a) have many steps within the relevant range b) are fixed over a fairly wide range of activity c) are also known as semivariable costs

b

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, choose the periods with the highest and lowest ______. a) total cost b) activity

b) activity

How much contribution margin is generated by every dollar of sales is shown by the ______. a) gross margin ratio b) contribution margin ratio c) net income ratio d) contribution margin per unit

b) contribution margin ratio

Using the high-low method, the fixed cost is calculated ______. a) before the variable cost is calculated b) using either the high or low level of activity c) after the variable cost per unit is calculated d) by adding the total cost to the variable cost

b, c

Which of the following statements are true? a) Within the relevant range of activity, total variable costs do not change. b) Outside of the relevant range, cost behavior conclusions may not be valid. c) The relevant range of activity is approximated by a straight line. d) Within the relevant range of activity, fixed costs remain constant in total.

b, c, d

A shift from product costing to a focus on cost ___________is the key to making most managerial decisions

behavior

How total costs changes as some level of activity changes is called cost ___________

behavior

A contribution margin income statement ______. a) reports both gross margin and net income b) is prepared primarily for external reporting purposes c) can assist with management decision making d) separates costs into their fixed and variable components

c,d

difference in variable costing & full absorption profit=

change in ending inventory x fixed moh/unit produced

A fixed cost, such as a long-term lease, that is difficult for a manager to change in the short-run is called a(n) ____________ fixed cost.

committed

total variable cost change w/ activity, per unit variable costs are..

constant

After fixed costs have been covered, _____________ _________________ becomes net operating income.

contribution margin

independent variable

cost driver

A fixed cost that is relatively easy for a manager to change in the short-run, such as travel or advertising, is called a(n) __________ fixed cost.

discretionary

to understand how costs will change, you need to which costs are...

fixed & variable (internal reporting approach- variable costing)

Contribution margin first goes to cover ___________ __________

fixed costs

step-variable costs

fixed over a narrow range of activity & rise in multiple steps across the relevant range

step costs

fixed over a range of activity, then increase in 'step-like' when capacity is reached

step-fixed costs

fixed over a wider range of activity

COGS=

full manufacturing cost/unit x units sold

variable costing

info based on cost behavior for internal sources (managers)

In the equation Y = a + bX, a denotes the __________ & ____________.

intercept & total fixed cost

committed fixed cost ex

long-term lease, office building, depreciation on ppe

discretionary fixed costs

managers have discretion over the level of spending (can change in the short-run bc of this)

relevant range

range of activity over which we expect our assumptions about cost behavior to be true

linearity assumption

relationship between total cost & activity can be approximated using a straight line

fixed costs in total

remain constant, regardless of activity changes

unit contribution margin

sales price per unit - variable cost per unit

contribution margin=

sales revenue - variable costs

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

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

scatterplot

In the equation Y = a + bX, b denotes the _________ & ____________

slope & variable cost/unit activity

per unit basis, fixed cost decrease w/ increase in activity levels because..

the fixed costs are spread over more units

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

the high-low method

contribution margin income statement

the income statement that groups cost by behavior - variable or fixed - and highlights the contribution margin

When using the high low method, the difference in cost divided by the difference in activity is ______.

the variable cost per unit

cost behavior

the way total cost behaves/changes when some measure of activity does

Within the relevant range, ___________fixed , costs remain constant on a per unit basis.

variable

ex of cost behavior

# of units produced, customers served, direct labor hours, machine hours

A company has a contribution margin ratio of 40%. The president believes that spending $1,500 to advertise its product will increase sales by $10,000. How much will net income increase if the president is correct?

$2,500 Reason: $10,000 × 40% - $1,500 = $2,500 increase.

The unit contribution margin ______. a) is valid both within and outside of the relevant range b) tells how much each additional unit contributes to profit c) tells how much each additional unit provides to cover variable costs d) is the difference between total sales revenue and total variable costs

b

step-variable cost ex

starbucks employees are paid by the hr, not by how many customers come in during their shift

step-fixed cost ex

starbucks hires more supervisors & buys more space to fit all the customers coming in

dependent variable

total MOH cost, total labor cost, total utilities cost

linearity assumption equation

total cost = total fixed cost + (variable cost/unit x activity)

T/F: Presenting fixed costs on an average per unit basis makes them look like they are variable costs.

true

T/F: When using the high-low method, fixed costs are calculated after variable costs are determined.

true

Contribution margin ratio equation is ______.

unit contribution margin/unit sales price

change in ending inventory=

units produced - units sold

A contribution margin income statement ______. a) can assist with management decision making b) reports both gross margin and net income c) is prepared primarily for external reporting purposes d) separates costs into their fixed and variable components

a & d

Mixed cost (semi-variable)

fixed: base amount that will be incurred, regardless of activity variable: amount that changes based on activity changes/usage

committed fixed costs

harder to change bc managers are locked-in to the amount they can spend through contracts

R2

how accurate the data is w/ line of best fit

instead of classifying costs as either manufacturing (product) or nonmanufacturing (period( costs, we classify based on...

how they behave in response to a change in some measure of activity

variable costs in total

those that change in total in direct proportion to changes in activity

Step-_____________ costs have a fairly narrow range and rise in multiple steps across the relevant range.

variable