ACTG 211 ch.6-9

Sorin Incorporated, a company that produces and sells a single product, has provided its contribution format income statement for January. Sales (3,200 units)$67,200 Variable expenses38,976 Contribution margin28,224 Fixed expenses20,900 Net operating income$7,324 If the company sells 3,500 units, its total contribution margin should be closest to:

$30,870 Selling price =. $67,200/ 3,200 = $21 Variable cost = $38,976 / 3,200 = $12.18 Sales = $21 * 3,500= $73,500 Variable cost = $12.18 * 3,500= ($42,630) Contribution margin = 73,500 - 42,630 = 30,870

How would the following costs be classified (product or period) under variable costing at a retail clothing store? Cost of purchasing clothing Sales commissions A)ProductProduct B)ProductPeriod C)PeriodProduct D)PeriodPeriod

Choice B

The impact on net operating income of a small change in sales for a segment is best predicted by using :

Contribution Margin ratio

Production budget

must be adequate to meet budgeted sales and to provide for desired ending inventory

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

Unfavorable variance

occurs when actual costs are greater than budgeted costs

Favorable variance

occurs when actual revenue is greater than budgeted revenue OR occurs when actual costs are less than budgeted costs

Planning budget

prepared for a single, planned level of activity

self-imposed or participative budget

prepared w/ full cooperation and participation of managers at all levels

Quantity standards

specify how much of an input should be used to make a product or provide a service

Price standards

specify how much should be paid for each unit of the input

Break- even analysis assumes that :

unit variable expense is constant

Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that

variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

A cost that would be included in product costs under both absorption costing and variable costing is:

variable manufacturing costs

Given the following data: Selling price per unit$2.00 Variable production cost per unit$0.30 Fixed production cost$3,000 Sales commission per unit$0.20 Fixed selling expenses$1,500 The break-even point in dollars is:

$6,000 Total Fixed Costs = Fixed Production Cost + Fixed Selling Expense Total Fixed Costs = $3,000 + $1,500 = $4,500 Variable Cost Per Unit = Variable Production Cost + Sales Commission Variable Cost Per Unit = $0.30 + $0.20 = $0.50 Contribution per Unit = Selling Price - Variable Cost per unit Contribution per Unit =. $2.00 - $0.50 = $1.50 Break- even point = (Total Fixed Cost/Contribution Per Unit) * Selling price per unit Break-even point in dollars = (4,500/$1.50) * $2.00 =$6,000

Bellue Incorporated manufactures a single product. Variable costing net operating income was $96,300 last year and its inventory decreased by 2,600 units. Fixed manufacturing overhead cost was $1 per unit for both units in beginning and in ending inventory. What was the absorption costing net operating income last year?

$93,700 Absorption costing net operating income = Variable costing net operating income - Fixed manufacturing overhead cost per unit * number of units =$96,300- $1 * 2,600 = $93,700

How much will a company's net operating income change if it undertakes an advertising campaign given the following data: Cost of advertising campaign$25,000 Variable expense as a percentage of sales42% Increase in sales$60,000

$9800 increase Effect on income = Increase in sales - increase in variable costs - advertising cost Effect on income = $60,000 - ($60,000*0.42) -$25,000

What does absorption costing assign?

Assigns fixed manufacturing overhead costs to units produced, a portion of fixed manufacturing overhead resides in inventory when units remain unsold

Alpha Corporation reported the following data for its most recent year: sales, $1,000,000; variable expenses, $600,000; and fixed expenses, $300,000. The company's degree of operating leverage is closest to :

4.0 Contribution margin = Sales - Variable expenses $400,000=$1,000,000-$600,000 Profit = Contribution margin - Fixed expenses $100,000 =$400,000-$300,000 Degree of operating leverage = Contribution margin / profit 4 = $400,000 / $100,000

Variable expenses for Alpha Corporation are 40% of sales. What are sales at the break-even point, assuming that fixed expenses total $150,000 per year:

Break-even point = total budgeted sales - Break even point Break-even point = fixed expenses / CM CM = Sales - Fixed expense Break - even point = $150,000 / 60%= $250,000

T/F: Absorption costing treats all fixed costs as product costs

False

What happens if you do not account for upstream and downstream costs?

Omitting these from profitability analysis will result in undercosting of products

Segment margin

computed by subtracting traceable fixed costs of a segment from its contribution margin -Don't allocate common costs to segments

Budget

detailed quantitative plan for acquiring and using financial and other resources over a forthcoming time period

Variable costing

fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced

Absorption costing

fixed manufacturing costs must be assigned to products to properly match revenues and costs

A $2.00 increase in a product's variable expense per unit accompanied by a $2.00 increase in its selling price per unit will:

have no effect on the break-even volume

Downstream costs

include marketing, distribution, and customer service costs -non-manufacturing costs

Upstream costs

include research and development and product design costs -non-manufacturing costs

How is absorption costing influenced?

income is influenced by changes in unit sales and units of production -net operating income can be increased by producing more units even if not sold

How is variable costing influenced?

income only affected by changes in unit sales; not by number of units produced -when sales go up, net operating goes up

T/F: Variable costing is more compatible with cost-volume-profit analysis than is absorption costing

True

Allocating common fixed expenses to business segments :

may cause managers to erroneously discontinue business segments

The costing method that treats all fixed costs as a period costs is :

Variable costing

continous or perpetual budget

a 12-month budget that continuously rolls forward one month (quarter) as current month (quarter) is completed

Spending variance

actual cost - flexible budget cost

Revenue variance

actual revenue - flexible budget revenue

Flexible budget

an estimate of what revenues and costs should have been given actual level of activity for the period

Segment

any part or activity of an organization about which managers seek cost, revenue, or profit data

Common fixed costs

arise b/c of overall operation of company and would not disappear if any particular segment were eliminated

Traceable fixed costs

arise b/c of the existence of a particular segment and would disappear over time if the segment itself disappeared

Operating budget

company's budget ordinarily covers one-year period corresponding to its fiscal year

Break-even analysis

computed by dividing the sum of the company's traceable fixed expenses and common fixed expenses by company's overall contribution margin ratio