Chapter 5 Managerial Accounting

Using the high-low method, a company calculated the variable cost as $1.75 per unit. The high level of activity was 5,000 units and $10,000 of total cost. Total fixed costs equals $ __________

1250

Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced, and variable selling and administrative expense is $13 per frame sold. The company produces 5,000 units each month and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is $______

68

Pearls, Pearls, Pearls! manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is $ ________

79398

Why is it important to analyze mixed costs?

Managers need to know how much of a cost is variable and how much is fixed. To make decisions, managers need to know how costs change.

Which of the following statements are true?

Mixed costs contain both fixed and variable cost elements. Both the total cost and the per-unit cost of mixed costs change with changes in the level of activity. The equation for a straight line can be used to express the relationship between mixed costs and the level of activity.

How much of the variability of y is explained by x is identified by ______.

R square

Which of the following is not a method used to estimate the fixed and variable portions of mixed costs?

Relevant range analysis

Which of the following statements are true?

Scattergraphs are a way to diagnose cost behavior. Scattergraphs are used to help determine if the linear assumption is reasonable.

True or false: When using the high-low method, fixed costs are calculated after variable costs are determined.

True

The linearity assumption states ______.

a straight line approximates the relationship between cost and activity

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, choose the periods with the highest and lowest ______.

activity

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

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

The financial statement that organizes costs by their behavior instead of by their function is the ______.

contribution format income statement

After fixed costs have been covered, ______ __________ becomes net operating income.

contribution margin

A fixed cost that is relatively easy for a manager to change in the short-run, such as travel or advertising, is called a(n) __________ fixed cost

discretionary

True or false: Absorption costing and variable costing always result in the same net operating income for the year.

false

True or false: Nonmanufacturing costs are reported as inventory when using full absorption costing.

false

True or false: The visual-fit method provides a more precise estimate of fixed and variable costs than either high-low or least-squares regression.

false

Costs that remain constant in total and vary per unit are called _______ costs.

fixed

In a least-squares regression line, the vertical intercept (a) of the line represents the total ________ cost

fixed

Contribution margin first goes to cover _________ _________

fixed costs

Assume that a company sells 5,000 units each month, at a price of $50 per unit. If the company computes net operating income using absorption costing, the net income will be ______.

highest when units produced exceeds units sold

A fixed cost remains fixed ______ within the relevant range of activity

in total

Variable costs vary ______ within the relevant range of activity

in total

The high-low method ______.

is based on the two most extreme periods of activity uses only two data points

The assumption that the relationship between total cost and activity can be approximated by a straight line is called the _________ assumption.

linearity

Differences in profit between absorption and variable costing can occur in ______.

manufacturing companies only

When inventory decreases, cost of goods sold under absorption costing will be ______ cost of goods sold under variable costing.

more than

Nonmanufacturing costs are ______.

never reported as inventory

The high-low method ______.

only uses two data points calculates the line based on the most extreme activity data points provides a reasonable estimate as long as the data points are within the relevant range

Cost assumptions are reasonably valid within the _______ ________ of activity.

relevant range

The level of activity over which cost behavior assumptions are true is known as the ___________ __________

relevant range

Variable costs ______

remain constant per unit and vary in total

Contribution margin is ______.

sales revenue minus variable costs

A useful first step in analyzing cost behavior is to prepare a(n) ___________ because it helps determine the nature of the relationship and whether the linearity assumption is valid.

scattergraph

A visual representation of the relationship between cost and activity is provided by a(n) _________

scattergraph

To answer preliminary questions such as whether the linearity assumption is valid, accountants use a(n) ____________

scattergraph

A limitation of ______ is that it is (they are) subjective and inexact.

scattergraphs

Mixed costs are also commonly known as ________ costs

semivariable

The unit contribution margin ______.

tells how much each additional unit contributes to profit

A simple approach that uses the two most extreme activity observations is ______.

the high-low method

When the number of units produced equals the number of units sold, net income will be ______.

the same under both absorption costing and variable costing

True or false: Presenting fixed costs on an average per unit basis makes them look like they are variable costs.

true

True or false: The key to most managerial decision is understanding cost behavior.

true

Contribution margin ratio is ______.

unit contribution margin/unit sales price

A cost that changes in direct proportion to changes in the activity level is a ______ cost.

variable

For internal decision making, it is best to use ______ costing.

variable

Step-_______ costs have a fairly narrow range and rise in multiple steps across the relevant range.

variable

The slope of the regression line represents the ______ cost per unit of activity.

variable

When using the high-low method, the slope of the line equals the ________ cost per unit of activity.

variable

Within the relevant range of activity, variable costs ______

vary in total remain constant per unit

Drawing a line though a scattergraph's data to provide an estimate of total fixed and variable cost per unit is called the _______ ________ method

visual fit

Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal ______.

$101,000 $42,000 + $59,000 = $101,000

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing reports $ ______ as the total fixed expenses.

28990

Given: Calculated variable cost per unit of $1.40 High level of activity: 2,500 units and $5,300 total cost The low level of activity was 1,000 units. Total cost at the low level of activity equals ______.

3,200 $5,300 - ($1.40 × 2,500) = $1,800 of fixed costs. $1,800 + (1,000 × $1.40) = $3,200 of total cost at the low level of activity.

Variable costing

Fixed manufacturing overhead is treated as a period cost and expensed in full each period.

Absorption costing

Fixed manufacturing overhead is treated as part of the per-unit product cost and expensed as units are sold.

Step-fixed costs ______

are fixed over a fairly wide range of activity

A shift from product costing to a focus on cost _______ is the key to making most managerial decisions.

behavior

How total costs changes as some level of activity changes is called cost ______

behavior

How total costs changes as some level of activity changes is called cost ________

behavior

A variable costing income statement ______.

calculates contribution margin, while the absorption costing income statement calculates gross margin focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs

Mixed costs ______

change both in total and per unit as activity changes

Full absorption costing can have a different bottom line (profit) than variable costing because of ______.

changes in inventory levels

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, ______.

choose the periods with the highest and lowest levels of activity and their associated costs

A fixed cost, such as a long-term lease, that is difficult for a manager to change in the short-run is called a(n) ______ fixed cost.

committed

Sales revenue minus variable costs equals ________ ________

contribution margin

Variable costing ______.

focuses on contribution margin instead of gross margin

A major limitation of _______ _________costing is that it sometimes encourages managers to overproduce.

full absorption

Managers may have an incentive to overproduce in order to increase profits when using ______ costing.

full absorption

Fixed costs________

generally include rent and supervisor salaries remain constant in total within the relevant range of activity should not be expressed on a per unit basis when making decisions

An absorption costing income statement calculates ______.

gross margin by deducting cost of goods sold from sales

A simple approach that uses the two most extreme activity observations is the ________ - ______ method.

high - low

Net operating income under absorption costing is generally ______ net operating income under variable costing in periods in which inventory increases.

higher than

When units produced exceed units sold, net income will generally be ______.

higher under absorption costing than under variable costing

The high-low method ______.

is easy to apply may produce inaccurate results

R square ______

is usually provided by least-squares regression software. measures goodness of fit

Fixed costs should not be expressed on a per -unit basis because ______

it may make managers believe they can reduce costs by producing more

A statistical technique for finding the best fitting line based on historical data is ______.

least squares regression

The best fitting line minimizes the sum of the squared errors when using ______

least-square regression

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called _____

least-squares regression

When using ______, proper interpretation of the results is critical.

least-squares regression

A contribution margin income statement ______.

separates costs into their fixed and variable components can assist with management decision making

Assume that a company sells 5,000 units each month, at a price of $50 per unit. If the company computes net operating income using variable costing, the net income will be ______.

the same every month

When using the high low method, the difference in cost divided by the difference in activity is ______

the variable cost per unit

In the equation Y = a + bX, a denotes the ______.

total fixed cost intercept

Using the high-low method, the fixed cost is calculated ______.

using either the high or low level of activity after the variable cost per unit is calculated

Which type of cost changes in total, in direct proportion to changes in activity level?

variable

In the equation Y = a + bX, b denotes the _________

variable cost per unit of activity slope of the line

The high-low method may provide a reasonable estimate of fixed and variable costs as long as the high and low data points fall ______ the relevant range.

within

Comfy Cozy Chairs makes and sells rockers. Each rocker requires $45 of direct materials and $37 of direct labor. Variable manufacturing overhead is $8 per unit, and fixed manufacturing overhead totals $58,000. Variable selling and administrative costs equal $15 per unit, and fixed selling and administrative costs total $102,000. During the period, 2,000 rockers were produced and 1,640 were sold. The unit product cost using absorption costing is ______.

$119 $45 + $37 + $8 + ($58,000/2,000) = $119

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. The total variable cost reported on Quaint Quilt's variable costing income statement is ______.

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

Given the following information, calculate the unit product cost under absorption costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $27/unit Fixed manufacturing overhead: $30,000 Units produced: 10,000 Units sold: 6,000

$155 $50 + $75 + $27 + ($30,000/10,000) = $155 per unit

A company has a contribution margin ratio of 40%. The president believes that spending $1,500 to advertise its product will increase sales by $10,000. How much will net income increase if the president is correct?

$2,500 $10,000 × 40% - $1,500 = $2,500 increase.

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit and fixed manufacturing overhead cost is $19,000 in total. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. Last period, 800 gloves were produced, and 585 gloves were sold. The unit product cost using variable costing is ______ per unit.

$47 Unit product cost = $22 + $18 + $7 = $47. Selling and administrative costs are never considered part of product cost.

JVL Inc. sells its only product for $10 per unit. Variable costs are $4 per unit and total fixed costs are $40,000. The company is currently selling 10,000 units per year. By how much will profits increase if sales increase 1,500 units?

$9,000 ($10 - $4) = $6 CM × 1,500 units = $9,000.

Baker's contribution margin ratio is 60%, which means that a $7,000 increase in sales will result in a $ ________ increase in net operating income

4200 7000*.6

Which of the following is found on a variable costing income statement but not an absorption costing income statement?

contribution margin

How much contribution margin is generated by every dollar of sales is shown by the ______.

contribution margin ratio

Net operating income is less under absorption costing than under variable costing when inventory for the period ______.

decreases

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