Accounting Exam 2 Concepts

Variable Costing Benefits

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

CM: Do we need to prepare an income statement to estimate profits at a particular sales volume?

No, we simply multiply the number of units sold above break-even by the CM per unit.

Transaction Driver

Number of times an activity occurs

Target Profit Analysis Equation Method: What does Q stand for?

Our goal is to solve for the unknown "Q" which represents the quantity of units that must be sold to attain the target profit.

Variable Costing: What falls under product and period?

Product: DM, DL, VMOH Period: FMOH, V selling, F selling

Absorption Costing: What falls under product and period?

Product: DM, DL, VMOH, FMOH Period: V selling, F selling

Operating Leverage

a measure of how sensitive NOI is to percentage changes in sales

ABC defines ______ levels of activity that largely do not relate to the volume of units produced.

five

CM is used first to cover ________ expenses. Any remaining CM contributes to ______.

fixed NOI

The traditional cost system overcosts _____ volume products and reports a _________ product margin for these product.

high lower

A customer margin tells us _______________ we are making from that particular customer

how much profit

Absorption Costing: Managers may __________ production to _________ unwarranted inventory to maximize income and therefore their own bonus.

increase build up

A product margin tells us how ___________ a particular product is.

profitable

Unit Cost Computations: Since the variable costs per unit, total fixed costs, and the number of units produced remained unchanged, the __________________ also remain unchanged.

unit cost computations

Variable costing net operating income: - is only affected by changes in _______ - is not affected by the number of units _________ - As a general rule, when sales go _______, net operating income goes up, and vice versa.

unit sales produced up

Absorption costing income: - is influenced by changes in _______ - is influenced by units of ________. - NOI can be increased simply by producing _____ units even if those units are not sold.

unit sales production more

Absorption costing income statements ignore ________. direct materials and direct labor costs direct and indirect cost distinctions product and period cost distinctions variable and fixed cost distinctions

variable and fixed cost distinctions

Traditional cost systems rely exclusively on allocation bases that are driven by the __________ of ___________.

volume of production

Because absorption costing assigns fixed manufacturing overhead costs to units produced,

- it gives the impression that fixed manufacturing overhead is variable with respect to the number of units produced, but it is not. - The result can be inappropriate pricing decisions and product discontinuation decisions.

The contribution income statement helps managers calculate the impact on profits when there are changes in:

- selling price - cost - volume. The emphasis is on cost behavior.

2 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.

Traditional Income Statement v. Contribution IS 1. Used primarily by management. 2. Used primarily for external reporting.

1. Contribution 2. Traditional

Five steps for implementing activity based costing

1. Define activities, activity cost pools, and activity measures (cost driver). 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects using the activity rates and activity measures. 5. Prepare management reports (product report and customer report).

Units produced < units sold: 1. What is effect on inventory? 2. What is relation between variable and absorption incomes?

1. Inventory decreases 2. Absorption < Variable

Units produced > units sold: 1. What is effect on inventory? 2. What is relation between variable and absorption incomes?

1. Inventory increases 2. Absorption > Variable

Units produced = units sold: 1. What is effect on inventory? 2. What is relation between variable and absorption incomes?

1. No change in inventory 2. Absorption = Variable

5 Limitations of ABC:

1. Substantial resources required to implement and maintain. 2. Resistance to unfamiliar numbers and reports. 3. Desire to fully allocate all manufacturing costs to products. 4. Potential misinterpretation of unfamiliar numbers. 5. Does not conform to GAAP. Two costing systems may be needed.

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 managers to be held accountable for costs they cannot control.

Manufacturing companies typically combine into what 5 classifications:

1. Unit level activity 2. Batch level activity 3. Product level activity 4. Organization Sustaining Activity 5. Customer Level Activity

Costs deferred: Units Produced _ Units Sold Costs released: Units Produced _ Units Sold

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ABC: Activity Cost Pool

A "cost bucket" in which costs related to a single activity measure(cost driver) are accumulated.

_________________ costing also uses non-volume related allocation bases.

ABC

_____________________ costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products.

ABC

_______________costing only assigns manufacturing overhead costs consumed by products to those products.

ABC

ABC: Activity

An event that causes the consumption of overhead resources.

The break even point is where you sell just enough units to cover _________________?

FE

The only difference between variable costing and absorption costing lies in the treatment of:

FMOH

Operating leverage is a measure of how sensitive ________ is to percentage changes in _______.

NOI sales

_____ is the measure of goodness of fit in least-squares regression.

R2

Which of the following is a common mistake made by companies when assigning costs to segments? They use allocation bases that drive the costs when assigning costs to segments. They trace fixed expenses to segments when it is feasible to do so. They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs. They include "upstream" and "downstream" costs when preparing profitability analyses that relate to individual product costs.

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.

______________ costing allocates all manufacturing overhead costs using a volume-related allocation base.

Traditional

__________________ disregards selling and administrative expenses because they are assumed to be period expenses.

Traditional

________________costing allocates all manufacturing overhead to products.

Traditional

What are the two common types of activity measures?

Transaction Driver and Duration Driver

Which of the following costing approaches is best suited for cost-volume-profit analysis? Absorption Normal Standard Variable

Variable

CVP: The variable costs are constant _________ and the fixed costs are constant in_____ over the entire relevant range.

per unit total

Job order costing and process costing used the _________ ___________ method.

absorption costing

Under absorption costing,______________ , are included when determining unit product cost.

all production costs, variable and fixed

Duration Driver

amount of time needed or an activity

Segment

any part or activity of an organization about which a manager seeks cost, revenue, or profit data

Activity Cost Pool: Customer Relations

assigned all costs associated with maintaining relations with customers

Activity Cost Pool: Order Size

assigned all costs of resources consumed as a consequence of the number of units produced

Activity Cost Pool: Design Changes

assigned all costs of resources consumed by customer requested design changes

Activity Cost Pool: Customer Orders

assigned all costs of resources that are consumed by taking and processing customer orders

Activity Cost Pool: Other

assigned all organization-sustaining costs and unused capacity costs

Why do traceable fixed costs arise?

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

Why do common fixed costs arise?

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

ABC differs from traditional cost accounting: Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a _____________ basis.

cause and effect

CVP: Selling price per unit is _______.

constant The price of a product or service will not change as volume changes.

In the first-stage allocation of overhead costs, products, customer orders and customers are examples of ________.

cost objects

Which of the following is not a management report that is normally prepared with ABC data? Product profitability Customer margins Customer profitability

customer margins

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.

decrease

NOI is higher under absorption costing because FMOH cost is _________ in inventory under absorption costing as inventories increase.

deferred

Traditional cost systems usually rely on _________ hours and/or machine hours to allocate all overhead costs to products.

direct labor

ABC: Relying exclusively on ______________ and/or machine hours to assign overhead costs to products has come under increased scrutiny in today's manufacturing environment.

direct labor hours

The Margin of Safety can be expressed in _________, ___________, and ___________.

dollars percentage units

Direct labor and machine hours work correctly when they are _____________ costs.

driving

Break-Even Analysis: The ________ and ________ methods can be used to determine the unit sales and _______ sales needed to achieve a target profit of _______.

equation formula dollar zero

Because on an economy-wide basis: the variety of products produced by companies has ______________ the complexity of overhead costs

increased

All of the following are levels of activity that ABC uses except ________. product level batch level industry level customer level

industry level

The segment margin is the best gauge of the ____________________ of a segment

long-run profitability

The traditional cost system undercosts _____ volume products and reports a __________ product margin for these product.

low higher

The higher the margin of safety, the _______ the risk of not breaking even and incurring a ________.

lower loss

Segments: Once a company prepares a contribution format IS, it can use this statement to __________.

make decisions and perform break-even analysis

ABC differs from traditional cost accounting: ABC does not assign ALL ______________ costs to products

manufacturing

ABC differs from traditional cost accounting: Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique ___________________________ (cost driver).

measure of activity

CVP: In _____________ companies, the mix of products sold remains constant.

multiproduct

The use of absorption costing for segmented income statements results in ________. omission of upstream and downstream costs failure to trace costs directly inappropriate use of allocation base arbitrary division of common costs among segments

omission of upstream and downstream costs

Under variable costing, _____________ are included in product costs.

only the variable production costs

Because on an economy-wide basis: direct labor and overhead costs have been moving in ____________ direction

opposite

Sales, variable expenses, and CM can also be expressed on a ____________ basis.

per unit

NOI is lower under absorption costing because FMOH cost is _________ in inventory under absorption costing as inventories decrease.

released

Contribution Margin(CM)

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

Segments: Fixed expenses that are traceable to one segment can become common fixed expenses if _________.

the company is divided into smaller segments

Margin of Safety

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

Segments: Common fixed expenses should not be allocated to __________________.

the individual divisions

Break-even point is the level of sales at which ______. total profits equals total costs total profits exceed total costs total revenue equals total costs total sales equal total projections

total revenue equals total costs