ACC 213 (exam 2)

The segment margin

is obtained by deducting the traceable fixed costs of a segment from the segment's contribution margin. It represents the margin available after a segment has covered all of its own costs. The segment margin is the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment.

Contribution margin

is the amount remaining from sales revenue after variable expenses have been deducted. Thus, it is the amount available to cover fixed expenses and then to provide profits for the period. Notice the sequence here—contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits.

Break even point

is the level of sales at which profit is zero. for example :If enough speakers can be sold to generate $35,000 in contribution margin, then all of the fixed expenses will be covered and the company will break even for the month

anticipated profits To illustrate, if Acoustic Concepts is currently selling 400 speakers per month and plans to increase sales to 425 speakers per month, the anticipated impact on profits can be computed as follows:

Additional speakers to be sold 25 Contribution margin per speaker × $100 Increase in net operating income $2,500

Target Profit Analysis in Terms of Dollar Sales

In the case of Acoustic Concepts, the dollar sales to attain its target profit would be computed as 750 speakers × $250 per speaker, or $187,500 in total sales.

To avoid mistakes when absorption costing is used, readers of financial statements should be alert to changes in inventory levels.

True

When sales are constant, net operating income is constant.

True

true or false margin of safety also can be expressed in terms of the number of units sold by dividing the margin of safety in dollars by the selling price per unit.

True

high-low and least-squares regression methods both rely on the following equation for a straight line to express the relationship

Y= a + bx

A traceable fixed cost

a fixed cost that is incurred because of the existence of the segment—if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear. Examples of traceable fixed costs include the following:

account analysis

an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves.

dependent Variable

because the amount of cost incurred during a period depends on the level of activity for the period. (That is, as the level of activity increases, total cost also will ordinarily increase.)

The .........................income statement emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.

contribution

contribution margin ratio (CM ratio).

contribution margin / sales

Linear cost behavior

exists whenever a straight line is a reasonable approximation for the relation between cost and activity.

True or false when sales go up, net operating income goes down

false income would also go up

operating leverage

is a measure of how sensitive net operating income is to a given percentage change in dollar sales. Operating leverage acts as a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income.

How do you estimate the profit at any sales volume above the break-even point,

multiply the number of units sold in excess of the break-even point by the unit contribution margin.

variable costing

only those manufacturing costs that vary with output are treated as product costs. This would usually include direct materials, direct labor, and the variable portion of manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this method.

sales Mix

refers to the relative proportions in which a company's products are sold. The idea is to achieve the combination, or mix, that will yield the greatest profits. Most companies have many products, and often these products are not equally profitable. Hence, profits will depend to some extent on the company's sales mix. Profits will be greater if high-margin rather than low-margin items make up a relatively large proportion of total sales.

difference between costing income statement and absorption costing income statement

the two methods account for fixed manufacturing overhead costs differently—all other costs have the same affect on net operating income under the two methods. In absorption costing, fixed manufacturing overhead costs are included in work in process inventory. When units are completed, these costs are transferred to finished goods and only when the units are sold do these costs flow through to the income statement as part of cost of goods sold. In variable costing, fixed manufacturing overhead costs are considered to be period costs—just like selling and administrative costs—and are taken immediately to the income statement as period expenses.

True or false

traceable fixed costs are charged to segments and common fixed costs are not

Absorption costing

treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead.

True or false... The high-low method is based on the rise-over-run formula for the slope of a straight line.

true

independent variable causes variations in cost

true

target profit analysis

we estimate what sales volume is needed to achieve a specific target profit.

contribution format income statement can be expressed in equation form as follows: When a company has only a single product, as at Acoustic Concepts, we can further refine the equation as follows:

(sales- variable expenses)- fixed expenses

Break even in $$$$ dollars

In the case of Acoustic Concepts, the break-even point in dollar sales using this approach would be computed as 350 speakers × $250 per speaker, or $87,500 in total sales. Remembering that Acoustic Concepts' contribution margin ratio is 40% and its fixed expenses are $35,000, the equation method calculates the break-even point in dollar sales as follows

So, in the case of Acoustic Concepts, this relationship would be as follows:

Acoustic Concepts' CM ratio of 40% means that for each dollar increase in sales, total contribution margin will increase by 40 cents ($1 sales × CM ratio of 40%)

These are examples of what type of cost? The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing. The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of The Walt Disney Corporation.

Traceable fixed cost

True or false....contribution income statement are prepared for management's use inside the company and would not ordinarily be made available to those outside the company.

True

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

True

why did net operating income go up from January to February even though sales were exactly the same.....

it was simply because the number of units produced exceeded the number of units sold in February and so some of the fixed manufacturing overhead costs were deferred in inventories in that month. These costs have not gone away—they will eventually flow through to the income statement in a later period when inventories go down. There is no way to tell this from the absorption costing income statements.

To analyze mixed costs with the high-low method

rember to calculate based on change in cost divided by change in activity.

incremental analysis

that is, they consider only the costs and revenues that will change if the new program is implemented. focus on cost and revenues that that change as a result of a decision focuses attention on the specific changes that would occur as a result of the decision.

Explain how changes in activity affect contribution margin and net operating income.

contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period. For example....For each additional speaker the company sells during the month, $100 more in contribution margin becomes available to help cover the fixed expenses. If a second speaker is sold, for example, then the total contribution margin will increase by $100 (to a total of $200) and the company's loss will decrease by $100, to $34,800:

what would happen if commission changed rather than having a flat salary per month. for example: paying salespersons a sales commission of $15 per speaker sold, rather than the flat salaries that now total $6,000 per month.

it would affect both variable and fixed expenses....Variable expenses per unit would increase by $15, from $150 to $165, and the unit contribution margin would decrease from $100 to $85. Fixed expenses would decrease by $6,000, from $35,000 to $29,000.