Accounting Exam 1

The costs incurred to sell a product would be classified as what kind of cost?

Downstream costs

Brock Company makes candy. During the most recent accounting period Brock paid $3,000 for raw materials, $4,000 for labor, and $2,000 for overhead costs that were incurred to make candy. Brock started and completed 10,000 units of candy of which 8,000 were sold. What would the balance in the inventory account on Brock's balance sheet be?

$1,800

Handy Hiking produces backpacks. In the previous year, its highest and lowest production levels occurred in July and January, respectively. In July, it produced 4,000 backpacks at a total cost of $110,000. In January, it produced 2,500 backpacks at a total cost of $87,500. Using the high/low method, the average variable cost per of producing a backpack was what?

$15

At a production and sales level of 3,000 units, Bastion Company incurred $60,000 of fixed cost and $36,000 of variable cost. What is the company's cost per unit when 4,000 units of product are produced and sold?

$27

A company incurred $5,000 of depreciation on its manufacturing equipment during its first year of operation. During this year the company made 2,500 units of product and sold 2,000 units of product. Based on this information alone the company would show what on the income statement?

$4,000 of cost of goods sold expense

Handy Hiking produces backpacks. In the previous year, its highest and lowest production levels occurred in July and January, respectively. In July, it produced 4,000 backpacks at a total cost of $110,000. In January, it produced 2,500 backpacks at a total cost of $87,500. Using the high/low method, the total estimated fixed cost was what?

$50,000

Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. What is the contribution margin per unit?

$6

Omega Company has sales of $300,000 and cost of goods sold of $200,000. The cost of goods sold is a variable cost. The Company incurred $20,000 of fixed operating expenses and $40,000 of variable operating expenses. Based on this information a 10% increase in revenue will produce what change in income?

15% change in income

Boland Company sells a product that is priced at $20 per unit. The per unit contribution margin is equal to 25 percent of the sales price. If fixed cost amount to $55,000 and the company has a desired profit of $20,000, what is the number of units that must be sold to earn the desired profit?

15,000 units

Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. How many units of product must Green produce and sell to break even?

40,000 units

At a sales level of $270,000, the magnitude of operating leverage for Donuts Unlimited is 2.8. If number of units sold increase by 15%, profits will increase by what?

42%

A company makes and sells a unique computer that is designed for a specific market. Sales price is $1,500 per unit, variable cost is $1,000 per unit, and fixed costs are $120,000. This company expects to make and sell 300 computers. Based on this information, what is the margin of safety (expressed in units)?

60 units

Green Manufacturing Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. How many units of product would Green be required to sell in order to earn a desired profit of $180,000?

70,000 units

What is the margin of safety? What can it be measured in?

A measure of the distance between budgeted sales and the break-even point. It can be measured in dollars, in units or as a percentage.

What is not included in a break-even graph?

A variable cost line

What is the primary difference between cost classification for a manufacturing firm versus a merchandising firm?

All costs for a manufacturing firm are midstream costs for a merchandising firm.

Kitts Co. buys and sells a product that has a variable cost per unit of $18. Kitts' fixed costs amount to $40,000 and a desired profit of $8,000. The product sells for $22 each. If Kitts is able to reduce fixed costs by $12,000, the number of units that must be sold to earn the desired profit will decrease by what?

Decrease by 3,000

The cost of a small amount of glue used to manufacture a product may be called what three things?

An overhead, product, or indirect cost

What is the affect of paying cash for commissions paid to sales staff on a company's balance sheet and income statement?

Assets, equity, and net income all decrease

What is the affect of using supplies on a company's balance sheet and income statement?

Assets, equity, and net income all decrease. Expenses increase

What formula(s) determine the margin of safety?

Budgeted sales in units - break-even sales in units; budgeted sales in dollars - break-even sales in dollars; (budgeted sales in units - break-even sales in units) ÷ budgeted sales in units.

The cost of denim used to manufacture blue jeans would most likely be classified as a (direct/indirect) material.

Direct

What is the affect of paying cash for wages of production workers on a company's balance sheet and income statement?

Cash decreases, inventory increases. Thus, assets +/- and nothing else is affected

The magnitude of operating leverage can be determined by what formula?

Contribution margin ÷ net income

All other things being equal, decreasing fixed cost will (increase/decrease) the number of units that must be sold to earn a desired profit.

Decrease

All other things being equal, if a company increases its sales price per unit, will the number of units necessary to reach the break-even point increase or decrease?

Decrease

Bradley Company sells a product that has variable costs of $50 each and a sales price $75 each. Bradley has fixed costs of $100,000 and a desired profit of $25,000. If the Company is able to reduce its variable cost per unit to $35 while holding all other items constant, the number of units that must be sold to earn the desired profit will decrease by what?

Decrease by 1,875 units

Give examples of costs that would be included as part of manufacturing overhead.

Depreciation of production equipment, lubricants for production equipment, maintenance workers' salaries at the factory

Brock Company makes candy. During the most recent accounting period Brock paid $3,000 for raw materials, $4,000 for labor, and $2,000 for overhead costs that were incurred to make candy. Brock started and completed 10,000 units of candy of which 8,000 were sold. Brock would recognize what on its income statement?

Expense of $7,200

Financial accounting focuses on the needs of (internal/external) users.

External

True or false: the Financial Accounting Standards Board (FASB) establishes standards for the preparation of financial accounting reports while the Securities and Exchange Commission (SEC) establishes standards for the preparation of managerial accounting reports.

False; the FASB and the SEC provide standards, rules, and guidance for financial reporting. Managerial accounting is largely unregulated.

Which branch of accounting focuses more on historical data?

Financial accounting

If a cost is constant on a graph, i.e. rental cost, what cost does that represent?

Fixed cost

Operating leverage is caused by what?

Fixed cost

Pete's Chilly Dogs sells hot dogs, chips, and drinks from 5 portable hot dog carts stationed on street corners. The depreciation cost on the carts is $1,000 per year for each cart. The company buys supplies as needed. The 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. Relative to the number of customers at a particular stand, is the depreciation cost fixed, variable, or mixed?

Fixed since total depreciation charge does not change in relation to the number of customers that buy food at a particular stand

A company buys and sells a product that has a variable cost per unit of $18. Their fixed costs amount to $48,000. The product sells for $22 each. As a result of competition the company has been forced to establish a target sales price of $21 per unit. If they implement the pricing strategy, the break-even point will increase to what?

From 12,000 units to 16,000.

Assume that a company incurs a mixture of fixed and variable product costs; and that all of its operating expenses are fixed. Finally, assume that the company earns a profit by making and selling 1,000 units of product. Under these conditions, the contribution margin will be (greater/lesser) than the gross margin.

Greater

Omega Company has sales of $300,000 and cost of goods sold of $200,000. The cost of goods sold is a variable cost. The Company incurred $20,000 of fixed operating expenses and $40,000 of variable operating expenses. What is the company's gross margin and contribution margin?

Gross margin is $100,000; contribution margin is $60,000

What is shown on the horizontal/vertical axis of a break-even graph?

Horizontal represents sales volume in units, vertical represents dollars

The cost of manufacturing a product includes what? What does it NOT include?

Includes materials, labor, and overhead. Does NOT include advertising

All other things being equal, if Kitts Company increases its total fixed cost, will the number of units necessary to reach the break-even point increase or decrease?

Increase

Decreasing the contribution margin per unit will (increase/decrease) the number of units that must be sold to earn a desired profit.

Increase

As volume decreases, fixed cost per unit (increases/decreases)

Increases

The wages of factory maintenance personnel would usually be considered as what?

Indirect labor and manufacturing overhead

Give an example of a cost that would NOT be included as part of manufacturing overhead.

Insurance on sale vehicles

Managerial accounting focuses on the needs of (internal/external) users.

Internal

Product costs are placed in which financial statement account when incurred?

Inventory

What is the primary difference between midstream costs incurred at a manufacturing firm versus a service firm?

Inventory at a service company is consumed immediately as opposed to being stored for future use at a manufacturing firm.

Fran Company is currently operating profitably. The company has a fixed cost structure. If volume increases by 20%, what will happen to profitability?

It will increase by more than 20%.

Managerial accounting reports are (more/less) regulated than financial accounting reports.

Less; managerial accounting focuses on preparing information for internal users. The types and quality of information are dictated by the management of the reporting entity and are not subject to regulatory requirements.

According to GAAP, which type of costs are classified as product cost?

Midstream costs

A fixed cost structure has (more/less) risk of volatile changes in net income than a company with a variable cost structure.

More

As compared to companies with low operating leverage, companies with high operating leverage have what relating to opportunity and risk?

More opportunity and risk

Can a company that has only variable cost benefit from operating leverage?

No; operating leverage is the result of fixed cost behavior. It can have negative consequences as well as positive. It is not affected by variable cost.

Kitts Co. buys and sells a product that has a variable cost per unit of $18. Kitts' fixed costs amount to $48,000. The product sells for $22 each. The Company is currently making and selling 16,000 units of product. If Kitts is able to increase sales by 2,000 units, the break-even point will (increase/decrease).

Not change

Describe the flow of product costs in a manufacturing company.

Product costs are first accumulated in an asset account (Inventory) and then transferred to an expense account (Cost of Goods Sold) when the products are sold.

The area after a break-even point on a graph represents (profit/loss).

Profit

What are some characteristics of managerial accounting information?

Provides information to the company's management team, future oriented, more willing to sacrifice reliability to gain relevance than financial accounting

Due to competition Simmons company is forced to lower its target sales price. To maintain its current profit, Simmons' could do what three things?

Reduce its variable cost per unit, increase the number of units it sells, and reduce its total fixed cost.

What are some true statements about scatter graphs?

Requires visual judgment to draw a line through the plotted points in a data set, assesses the accuracy of the high/low method of estimating fixed and variable costs, and may be used with the high/low method, and regression analysis as means of estimating variable and fixed costs

How is the contribution margin determined?

Sales cost - all variable costs

What do the slope and intercept of a scatter graph represent?

Slope represents variable cost per unit, intercept represents the total fixed cost

True or false: assuming sales equals production, and beginning/ending inventories are 0, the amount of net income of an accounting period will be the same regardless of if the income statement is prepared under a contribution margin format (managerial accounting) or the product costing format (financial accounting).

True

In a manufacturing firm, costs incurred to research a more fuel efficient engine would be classified as what kind of cost?

Upstream costs

Pete's Chilly Dogs sells hot dogs, chips, and drinks from 5 portable hot dog carts stationed on street corners. The depreciation cost on the carts is $1,000 per year for each cart. The company buys supplies as needed. The 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. Relative to the number of hot dog carts, is the depreciation cost fixed, variable, or mixed?

Variable

What is the break even point?

When revenue = total fixed + variable costs

Where is the break-even point on a break-even graph?

Where total revenue line intersects the total cost line

With respect to a company that is currently earning a profit, is a high margin of safety preferred? Why?

Yes; the higher the margin of safety the less likely a company is to incur a loss