ACG2071 EXAM 2

When the number of units produced equals the number of units sold, ________.

-absorption costing net income is equal to variable costing net income -all fixed overhead incurred flows to the income statement under both costing methods

The break-even point calculation is affected by _______.

-costs per unit -sales mix -selling price per unit

Common mistakes made by companies when assigning costs to segments include _______.

-inappropriately assigning traceable fixed costs -omitting costs that should be included -arbitrarily allocating common fixed costs

The selling and administrative expense budget _________.

-is divided into variable and fixed components -estimates nonmanufacturing expenses

Target profit analysis ______.

-is similar to break-even analysis -estimates sales needed to earn a given profit

CVP analysis focuses on how profits are affected by _________.

-selling price -unit variable cost -total fixed costs -sales volume -mix of products sold

Absorption costing and variable costing net operating income will be equal when ________.

-there is no beginning and no ending inventory -the number of units produced equals the number of units sold

When preparing a segment margin income statement _______.

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

Using absorption costing for segmented income statements can lead to ________.

-under-costing of segments -omission of upstream and downstream costs

CVP analysis allows companies to easily identify the change in profit due to changes in ______.

-volume -selling price -product mix

Frames, Inc. picture frames each require $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame and variable selling and administrative expense is $13 per frame sold. Total fixed manufacturing overhead cost per month is $15,000 and the company produces 5,000 frames each month. The unit product cost of each frame using variable costing is $ _____.

68

Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit product cost of $112 and a unit selling price of $190. If Blissful Breeze produces 900 fans and sells 842 fans this month, the total cost of goods sold will be $______.

94304

The equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is: selling price per unit = __________.

A special order bulk sale will not increase fixed costs and therefore they should not be considered in setting a price. Variable costs are what will be incurred to complete the order.

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is _________.

Break-even point = $305,000 ÷ $40 = 7,625

common fixed cost

a fixed cost that supports the operations of more than one segment but it is not traceable in while or in part to any one segment. Even if a segment is entirely eliminated, the ___________ will not change.

Because nonmanufacturing costs are not included as costs of a product, the use of __________ costing can lead to the omission of segment costs.

absorption

Fixed manufacturing overhead costs are included as part of Work in Process inventory under _________.

absorption costing only

Internal income statements are generally prepared using ________ costing and external income statements are generally prepared using ___________ costing.

absorption; variable

The two general costing approaches used by manufacturing companies to prepare income statements are _________ costing and __________ costing.

absorption; variable

Because it is needed for the schedule of expected cash collections, and the cash budget the annual master budget file generally starts with the beginning ____________.

balance sheet

The first tab included in the master budget file is generally a(n) _________ because it is needed for the schedule of expected cash collections.

balance sheet

A budgeted balance sheet is developed using data from the ___________ of the budget period and data contained in the various schedules.

beginning

Under absorption costing product costs consist of _______- costs.

both variable and fixed manufacturing

The sales volume level at which profits equal zero is the ________.

break-even point

When a manager creates a budget that is too easy to attain, _________ occurs.

budgetary slack

Which of the following budgets shows the company's planned profit?

budgeted income statement

The receipts, disbursements, excess or deficiency, and financing section are all parts of the _________ budget.

cash

On the cash budget, what is subtracted from total cash available to find the cash excess or deficiency?

cash disbursements

A company can repay outstanding principal and interest when________.

cash excess is greater than the minimum required cash balance.

Costs are separated into variable and fixed categories when using the _________ approach.

contribution

Variable costing income statements are based upon a ________ format.

contribution

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead ______.

deferred in the inventory account on the balance sheet

In a CVP graph, the vertical axis represents ________.

dollars

When using variable costing, fixed manufacturing overhead is Blank______.

expensed in the period incurred.

To calculate the break-even point (in unit sales and dollar sales), managers can use the equation method or the ___________ method.

formula

A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company ________.

has an overall net operating loss at $10,000

A traceable fixed cost ________.

is incurred because of the existence of the segment

A measure of how sensitive net operating income is to a given percentage change in unit sales is known as operating ___________.

leverage

More accurate estimates are generally the result of having profit targets set by ________________.

lower-level managers

Using budgeting assumptions when preparing the master budget, ______.

makes it easier to answer "what-if" questions

All costs of production other than direct materials and direct labor are shown on the _________ budget.

manufacturing overhead

Allocating common fixed expenses to business segments:

may cause managers to erroneously discontinue business segments.

If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:

net operating income

Operating leverage is a measure of how sensitive _________ is to a given percentage change in unit sales.

net operating income

Segment break-even calculations include _______ fixed expenses

only traceable

The target profit predicted by CVP analysis will _______ costing.

only work when using variable

What is usually the major source of receipts in the receipts section of the cash budget?

sales

The term used for the relative proportion in which a company's products are sold is _________.

sales mix

Estimating the sales volume required to earn a given amount of net income is known as _________ _________ analysis.

target profit

Only costs that would disappear over time if a segment disappeared should be treated as __________ fixed costs.

traceable

The variable costing income statement separates ________.

variable and fixed expenses

Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. This month 1,490 bottles were produced and 1,203 bottles were sold. Total cost of goods sold is ________.

$6,472.14

The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. Total variable expenses reported on Quaint Quilt's variable costing income statement for the quarter is _____.

($140 + $19) × 780 quilts sold = $124,020

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%) - $8,000 = $7,750 increase

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will ______.

An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

Higado Confectionery Corporation has a number of store locations throughout North America. In income statements segmented by store, which of the following would be considered a common fixed cost with respect to the stores? store manager salaries store building depreciation expense the cost of corporate advertising aired during the Super Bowl cost of goods sold at each store

C

Which of the following is true of a company that uses absorption costing? -Net operating income fluctuates directly with changes in sales volume -Fixed production and fixed selling costs are considered to be product costs -Unit product costs can change as a result of changes in the number of units manufactured -Variable selling expenses are included in product costs

C

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

CVP analysis

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will _________.

Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 125% = $15,000, an increase of $4,000 per month.

Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will _______ per month.

Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change, salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month.

If operating leverage is low, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income.

False (Operating leverage acts as a multiplier so with a high operating leverage, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income)

SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______.

Increased online sales contribution margin [$100,000 × 10% × ($60,000 ÷ $100,000)] is $6,000 + $5,000 saved from stopping catalog sales = $11,000

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ___________.

Margin of safety = $272,000 ÷ (100,000 × $17) = 16%

A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is _____________.

Sales volume = ($320,000 + $200,800) ÷ ($90-$28) = 8,400 units

In a CVP graph, the horizontal axis represents ________.

unit sales

Net operating income computed under variable costing would exceed net operating income computed using absorption costing if:

units sold exceed units produced.