managerial accounting test 2

variable costing income

is only affected by changes in unit sales. It is not affected by the number of units produced. - as a general rule, when sales go up, net operating income goes up and vice versa

once a company prepares a contribution format segmented income statement

it can use the statement to make decisions and perform break even analysis

the ______________________ is the excess budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred.

margin of safety

_________________________ is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits

operating leverage

the measure of how sensitive net operating income is to a given percentage change in dollar sales is called

operating leverage

the relationship between profit and the CM ratio can be expressed using the following equation:

profit = (CM ratio x Sales) - fixed expenses

the contribution format income statement can be expressed in the following equation:

profit = (sales - variable expenses) - fixed expenses

we can calculate break even by solving the equation:

profit = unit CM x Q - fixed expenses

contribution margin equals

sales minus variable costs

a _____________ is any part of activity of an organization about which a manager seeks cost, revenue, or profit data ex: individual store, sales territory, service center

segment

in ______________, we estimate what sales volume is needed to achieve a specific target profit

target profit analysis

contribution margin is

the amount remaining from sales revenue after variable expenses have been deducted

segment margin is

the best gauge of the long run profitability of a segment

the higher the margin of safety,

the lower the risk of not breaking even and incurring a loss

which of the following statements about the segment margin is not true?

the segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin

which of the following costing approaches is best suited for cost volume profit analysis

variable

which of the following costing approaches is best suited for cost-volume profit analysis?

variable

absorption costing income statements ignore

variable and fixed cost distinctions

variable costing categorizes costs as

variable and fixed so it is much easier to use this income statement format for CVP analysis

_______________ correctly identifies the additional variable costs incurred to make one more unit. It also emphasizes the impact of total fixed costs on profits

variable costing

sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

how can the relationships among revenue, cost, profit, and volume be expressed

graphically, by preparing a CVP graph

When the number of units produced is greater than the number of units sold, variable costing net operating income will be ________.

less than absorption costing net operating income

companies with ____ fixed cost structures enjoy greater stability in income across good and bad years

low

commissions based on sales dollars can lead to

lower profits in a company

if a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break even point in units will:

not change

which of the following statements about the segment margin is not true

the segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin

t/f: the contribution margin income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior.

true

t/f: traceable fixed costs of one segment may be common fixed cost of another segment

true

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

unit contribution margin

under _______________, only the variable production costs are included in the product costs

variable costing

costs assigned to a segment should include

all costs attributable to that segment from the company's entire value chain

t/f: the smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses

false

Advantage of high fixed cost structure

income will be higher in good years compared to companies with lower proportion of fixed costs

the profit graph is based on the following linear equation:

profit= unit cm x Q - fixed expenses

what is usually plotted as a horizontal line on the CVP graph?

fixed expenses

there are two keys to building segmented income statements:

1. a contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin 2. traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin

inappropriate methods of allocating costs among segments

1. failure to trace costs directly: costs that can be traced directly to specific segments of a company should not be allocated to other segments 2. inappropriate allocation base: some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments only when the allocation base actually drivers the cost being allocated

To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:

1. selling price is constant. The price of the product or service will not change as volume changes 2. costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. in multi product companies, the mix of products sold remains constant.

Variable vs. Absorption Costing

ABSORPTION COSTING- fixed manufacturing costs must be assigned to products to properly match revenues and costs VARIABLE COSTING- fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced

segment margin equation

Contribution Margin - Traceable fixed costs

_____________________ require publicly traded companies to include segmented financial data in their annual reports - helps avoid the contribution approach when it comes to internal reporting

GAAP and IFRS

absorption costing income

Influenced by changes in unit sales and units of production. Net operating income can be increased simply by producing more units even if those units are not sold.

under ________________, all production costs, variable and fixed, are included when determining unit product cost

absorption costing

Contribution Format Income Statement

Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income

traceable fixed costs

arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared

common fixed costs

arise because of the overall operation of the company and would not disappear if any particular segment were eliminated

what is used first to cover fixed expenses?

contribution margin - any remaining CM contributes to net operating income

moss feet shoe corporation is a single product firm. The company is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for the next year?

contribution margin ratio: increase break-even point: decrease

___________________ refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure

cost structure

break even point is the level of sales at which

total revenue equals total costs

what is represented on the X-axis of a cost volume profit (CVP) graph?

unit volume

Disadvantage of high fixed cost structure

income will be lower in bad years compared to companies with lower proportion of fixed costs

what are some examples of common fixed costs?

1. the salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors 2. The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the various departments

what are some examples of traceable fixed costs?

1. the salary of the Fritos product manager at Pepsi Co is a traceable fixed cost of the Fritos business segment of Pepsi Co 2. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing

Common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" for two reasons:

1. this practice may make a profitable business segment appear to be unprofitable 2. allocating common fixed costs forces manager to be held accountable for costs they cannot control

when a company sells more than one product,

break even analysis becomes more complex

with regards to interpretation, what are the important areas that appear on a CVP graph?

break-even point, loss area, and profit area

the difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for

fixed overhead costs