ACCTG 231 Exam 2

If a product has a cost of $195 and a markup percentage of 70% what is the selling margin of the product?

$136.50

Spaulding Brothers' sales for January, 2010, were $1,900,000. Spaulding Brothers projects an 8% increase in sales every month through December. The sales for March, 2011, are estimated at:

$2,216,160

If a product has a selling price of $325 and a markup percentage of 80% what is its cost?

$260

A linear regression analysis indicated a constant of 800, an X coefficient of 6.5, and an R-squared of 0.83. The estimated cost when the independent variable is 650 is:

$5,025

Tall grass Clothiers' president receives a bonus equal to 5% of net income. This bonus is included in the determination of net income and is tax deductible. The tax rate is 20%. If the company's income before the bonus was $14,500,000, the amount of the bonus is:

$557,692

What are the two primary reasons for not maintaining inventory

(1) Significant costs are incurred to hold inventory (2) Having inventory allows a company to "hide" its internal process problems because on hand inventory can be used to cover up for defects

What are the four primary reasons for maintaining inventory?

(1) To meet customer demand (2) To smooth production scheduling (3) To take advantage of quantity discounts (4) To hedge against anticipated price increases

What is the Profit Equation

(SP x Q) - (VC x Q) - FC = P

Define the Revenue Cycle as it pertains to the selling price.

- If the selling price of a product increases, the quantity of the product demanded decreases - If the selling price of the product decreases, the quantity of the product demanded decreases - Selling price does not affect the demand for a staple item as much as luxury item - Product quality and service also affect demand

What are the assumptions of Cost Volume Profit Analysis

- Selling price remains constant per unit regardless of the volume sold. - Variable cost remains constant per unit regardless of the volume produced and sold. - Fixed cost remains constant in total regardless of the volume produced and sold throughout the relevant range. - For manufacturing (merchandising) firms, the number of units produced (purchased) equals the number of units sold. - If more than one type of product is sold, the sales mix remains constant.

Stay Dry, Inc. sells umbrellas for $8.00 each. The variable cost per umbrella is $5.25. Total fixed costs are $3,800. The contribution margin ratio is:

.34

Harold's Shoe Emporium economic order quantity is 800 units. Demand for the year is 96,000 units. There are five days between the time an order is placed and the day it is received. Harold's Shoe Emporium operates 360 days per year. The reorder point is:

1,335 units

Define Behavior Patterns.

A behavior pattern is the relationship between an activity (X) and a cost or revenue (Y). It is expressed as: Y = mX + b.

Define Mandated Budgeting

A budget set by upper-level management; a top down approach.

Define Zero-Based Budgeting

A budgeting strategy in which the company considers each budget period a fresh start.

Define Budgetary Slack

A difference between reported budget numbers and realistic budget numbers.

Define the High-Low Method

A simple technique for computing the variable cost rate and the total amount of fixed costs that are part of mixed costs.

Define Ideal Standard

A standard that can be achieved only if operating conditions are almost perfect

Define Normal Standard

A standard that can be achieved under practical operating conditions.

Define the Linear Regression Method

A statistical tool for quantifying the relationship between just one independent variable and one dependent variable based on past experience.

Which of the following is not a short-term operating decision? A) Decision to buy a new plant in the next month. B) Decision to buy a component rather than make it ourselves. C) Decision to stop producing a particular product for the next six months D) Decision to reduce the normal price to get a large order from one customer

A) Decision to buy a new plant in the next month.

Define Markup

An additional amount added to the cost of products and services

Define Salary Pay

Based on a period of time

Define Hourly Pay

Based on the number of hours worked

Define Piece Rate Pay

Based on the number of items completed

Define Commission Pay

Based on the number of items sold

If fixed costs decrease, how will this affect the contribution margin, profit and breakeven point?

Because fixed cost are not used to determine the contribution margin it will not affect the contribution margin. However, because fixed cost impacts the total profit and breakeven point a reduction in the fixed cost will increase profit and decrease the breakeven point.

Define Revenue Process Planning

Begins with an estimate of sales volume given the expected selling price.

Define Incremental Budgeting

Budgeting using last year's budget as a starting point for this year's budget

Which of the following is true about budgetary slack? A) Budgetary slack is created when there is a difference between actual and budgeted amounts. B) Budgetary slack is created when a company uses normal rather than ideal standards when building their budget. C) Budgetary slack is created when a deliberate and unrealistic bias is introduced into the budgeting process. D) When budgeted amounts are the result of management's inability to be clairvoyant.

C) Budgetary slack is created when a deliberate and unrealistic bias is introduced into the budgeting process.

Which of the following is not true about safety stock: A) Keeping safety stock increases the carrying cost a company incurs. B) Is kept to prevent losses created by a stockout C) Is designed to prevent people from ordering too little inventory and creating a stockout. D) The amount of safety stock depends on the potential time the company could be out of inventory.

C) Is designed to prevent people from ordering too little inventory and creating a stockout.

The budgeting process impacts all of the following except? A) Resource allocation B) Communication and coordination among the departments of the business. C) Relationships with competitors D) The evaluation and control of actual performance

C) Relationships with competitors

Conversion process planning consists of all the following except: A) scheduling labor B) scheduling production C) budgeting cash payments for materials used in production D) planning manufacturing overhead

C) budgeting cash payments for materials used in production

The dollar amount of cash received from sales would be considered when preparing the:

Cash Receipt Schedule

Define Variable Cost/Variable Revenue

Changes in total in direct proportion to the change in the amount of activity driver throughout the relevant range. Note that on a per-activity basis, a variable cost or variable revenue does not change.

How does the revenue process planning relate to the balance scorecard?

Companies measure the customer perspective of the balance scorecard along two dimensions: customer satisfaction and customer loyalty.

Define Expenditure Process Planning.

Considers the use and payment for services and goods.

The term for the difference between the selling price and variable costs is:

Contribution margin

Formula for selling price

Cost + (Cost x Markup percentage)

Which of the following is not a factor in the EOQ inventory model? A) Annual demand for the inventory in units B) Cost of the inventory item C) Cost to place one additional order D) Cost to carry one additional unit in inventory

Cost of the inventory item

The preparation of a sales invoice is triggered by _____ and is completed by the ______ department.

Customer and Sales Department

Define Customers as it pertains to the selling price.

Customers want high quality and service at a reasonable price

What factors affect the selling price?

Customers, Competitors, Legal and Social Forces, and Cost

Which of the following is part of expenditure process planning? A) Sales budget B) Cash receipts budget C) Production budget D) Administrative Budget

D) Administrative Budget

Which of the following is not part of expenditure process planning? A) Direct labor and overhead budget B) Direct materials purchases budget C) Cash disbursements schedule D) Production budget

D) Production budget

Define Competitors as it pertains to the selling price.

Depending on the competitiveness of the market, competitors may influence the selling price

Define Fixed Cost/Fixed Revenue

Does not change in total as the amount of activity driver changes throughout the relevant range. Note that on a per-activity basis, a fixed cost or fixed revenue does change. As activity increased, the fixed cost or fixed revenue per unit will decrease, i.e., inverse relationship.

A bonus is a ___________ benefit

Fringe

Define Conversion Process Planning

Goals related to efficiency and quality

Define Cost/Revenue Behavior.

How cost or revenue reacts to a change in the level of operating activity

Normal standards used in the budgeting process is based on:

Ideal working conditions but allows for normal operating inefficiencies

Define Cost as it pertains to the selling price.

In the long run, the selling price set by a company must cover all its costs and provide a sufficient return to the owners.

The strategy whereby a company uses the current period's budget as a starting point and input from the lower levels of the organization in preparing next period's budget is referred to as:

Incremental and participatory budgeting

Define Accounts Receivable Schedule

Indicates the changes expected in the balance of accounts receivable during the budget period.

Define the Marketing and Distribution Budget

Indicates the planned expenditures for marketing and distribution activities.

Define Participatory Budgeting

Individual who are affected by the budget get input into the process; a bottom-up approach.

Define Activity Measures (Drivers)

Is a way of measuring the consumption or provision of resources. An activity driver is assumed to cause the observed changes in the cost or revenue under consideration.

The balanced scorecard approach is successful in reducing budgetary slack because:

It uses several different measures to assess how successful a department performed.

The __________ system uses cards to notify stock employees to replenish the supply of inventory.

Kanban

Define the Just-In -Time Inventory Model

Long-run model based on the principle that inventory should arrive just as needed for production in the quantities needed.

____________ budgets can eliminate budgetary slack and therefore build budgets that are based on management's goals without having to consider employee's input.

Mandatory

Define the economic order quantity (EOQ) model

Minimizes the total of short-term ordering costs plus short-term carrying costs for the period.

The type of environment in which there are many companies whose products/services are similar but not identical is referred to as:

Monopolistic competition

The seller of a product is a price maker in which environment?

Monopoly

Define Dumping

Occurs when a company sells its products below cost in foreign countries.

Define Price Fixing

Occurs when a group of companies agree to limit supply and charge identical (usually high) prices for their goods and services.

What pricing strategy describes the practice of setting the initial price low in an attempt to get a share of the market?

Penetrating Pricing

A compensation method whereby employees are paid according to the amount they produce in a given time-period is known as:

Piece-rate compensation

What are the benefits of budgeting?

Planning, Communication/Coordination, Resource Allocation, and Evaluation/Control

Prescription Drug Research (PDR) has discovered a new cancer medicine and has just received FDA approval to market the product. It costs PDR $.50 per pill to produce the new drug. PDR plans to take advantage of the demand for the product and has priced the pills at $20 per pill. This is an example of what pricing strategy?

Price Skimming

Define Sensitivity Analysis

Process of changing the key variables in cost-volume-profit analysis to determine how sensitive the cost-volume-profit relationships are to changes in these variables. - Change in Selling Price - Change in Variable Cost - Change in Fixed Cost - Change in Tax Rate

What are the types of markets that influence selling price?

Pure competition, Monopolistic competition, Monopoly, and Oligopoly

Define the Administrative Budget

Reflects the expected administrative costs, including administrative labor.

Define the Purchase Budget

Reflects the expected quantity and dollar amount of purchases needed to meet sales and desired levels of ending inventory.

Formula for Reorder Point

Reorder point = (Daily demand x Lead time) + Safety stock

Define Cash Receipt Schedule

Shows the anticipated cash collections from customers for the period.

Define Sales Budget

Shows the expected sales for the period in both physical (quantity) and financial (dollar) amounts for a particular product line, geographic area, or sales manager.

Define Monopoly

Since only one company operates in this environment, selling prices must be approved by the appropriate regulatory agency

Define Oligopoly

Since so few companies compete in this environment the government monitors selling prices

Formula for EOQ Model

Square root of (2DO/C) D = annual demand for inventory in units O = cost to place one additional order (batch-related cost) C = cost to carry one additional unit in inventory (unit-related cost)

Define Cost Volume Profit Analysis

Study of how costs, revenues, and profits change in response to changes in the volume of goods or services provided to customers

The pricing strategy where a company determines the selling price and then decides whether to enter the market is called:

Target Pricing

Define Carrying Costs

The costs incurred to carry one additional unit in inventory for the period.

Define Ordering Costs

The costs incurred to place one additional order

Define Net Pay

The employee's take-home pay; the gross pay less voluntary and involuntary withholdings.

Define Cash Disbursements Schedule

The expected amounts of cash payments for inventory, marketing and distribution costs, and administrative costs.

Define Bonus Base

The form of income the bonus rate is applied to

Define Gross Pay

The full amount the employee earns.

Define Reorder Point

The inventory level that, when reached, indicates the need to place an order for additional inventory.

Define Pure Competition

The market determines the selling price, the individual company is a price taker

Define Monopolistic Competition

The market has a large influence on selling price, the individual company must distinguish itself through quality, service, or functionality

Define Relevant Range.

The normal range of activity for a company

Define Bonus Rate

The percentage the bonus will pay.

Define the Breakeven Point.

The point where the total cost line intersects with the total revenue line is called the breakeven point. Because total revenues equal total costs at the breakeven point, it is the point where the company does not make a profit or incur a loss.

Define Life Cycle Pricing

The practice of setting a selling price that can be maintained over the life cycle of the product by first determining cost, then adding a markup to determine selling price. The price may initially be below its initial costs, but as production efficiency improves cost will decline. All costs over the life cycle from research and development through customer service must be included on the estimate of cos

Define Target Pricing

The practice of setting a selling price that can be maintained over the life cycle of the product by first determining the selling price, then subtracting a required return to determine the target cost.

Define Predatory Pricing

The practice of setting an initial low price to drive out the competition and then raise prices once the market is controlled (unethical and possibly illegal).

Define Price Gouging

The practice of setting excessively high price with the intent of reaping short-term excessive profits.

Define Budgeting

The process of expressing the company's goals and objectives in quantitative terms.

Define Skimming Pricing

The strategy in which the company initially sets a high selling price because a small proportion of our customers are willing to pay a higher price in order to be the first to have our product (legal).

Define Penetration Pricing

The strategy of setting an initial low price to entice people to try the product and to gain a market share (legal).

The breakeven point is the point at which:

The total contribution margin equals total fixed costs.

What are the four primary influences on selling price?

The type of customers, the nature of the competition, legal and social issues, and the costs of products all influence how prices are set

Define Legal and social forces as it pertains to the selling price.

There are legal restrictions and social influences on selling price

What are the disadvantages of budgeting?

Time/Resource Requirements, Adaptability of Departments and Segments, and Motivation and Behavior of Individuals

Define Contribution Margin

Total sales less total variable costs at a given level of activity; the portion of each sales dollar available to contribute to fixed costs and then provide a profit.

Define Short Term Operating Decisions.

Unplanned opportunities and threats lead to short-term operating decisions. Short-term operating decisions assume that capacity is fixed. They are Ad-Hoc and unique.

Y = m(X) is the formula for a(n):

Variable Cost

Define Mixed Cost/Mixed Revenue

Varies in total, but not in direct proportion, to a change in activity driver throughout the relevant range. Note that on a per-activity basis, a mixed cost changes.

The formula for a mixed cost is:

Y = m(X) + b