Managerial ACCT Chapter 2 SB

Assume a company has a contribution margin of $1,000, net income of $100, and fixed costs of $900. What is the magnitude of operating leverage?

$1,000/$100=10

Assume the following: 1) the scattergraph intersects the Y axis at $100; 2) the estimated line on the scattergraph increases by $5 for every unit of volume increase. What is total cost if volume is 100 units?

$100 + ($5 × 100 units) = $600

Using the high low method we estimated fixed costs to be $200,000 and variable costs to be $15 a unit. If 10,000 units are produced what is total cost?

$200,000 + ($15 * 10,000) **be very careful about using the lowest and highest VOLUME not costs.

A scattergraph shows that total cost at 20,000 units is $100,000. The scattergraph line intersects the Y axis at $20,000. What is variable cost per unit?

($100,000 - $20,000) ÷ 20,000 = $4

What happens if the activity level changes?

- fixed cost per unit changes - total fixed cost remains constant

Which of the following situations would be appropriate to calculate average cost per unit over a one day period?

- sales volume does not fluctuate on a day to day **If sales volume fluctuates, then you will get a different average cost per unit depending on the day you choose. In this case, it is recommended to use a longer time period such that the volume fluctuations are averaged out.

Which of the following occur when activity level increases?

- total fixed constant remains constant - fixed cost per unit decreases ** fixed cost per unit is NOT fixed; total fixed cost remains the same but fixed cost per unit decreases as volume increases

What happens If the activity level changes?

- total variable cost changes - variable cost per unit remains constant

What happens If the activity level changes?

- total variable cost changes - variable cost per unit remains constant **variable cost per unit remains constant regardless of activity level.

The range of activity over which the definition of fixed and variable costs are valid is called the --- range.

The Relevant Range: The range of activity over which the definition of fixed and variable costs are valid

An accounting firm's rent cost is $4,000 a month. The building has enough space for 25 accountants. This cost is

The rent cost is fixed as long as the firm employs 1 to 25 accountants so it is not a variable cost. If more than 25 employees are employed, the rent cost will increase, but still be fixed. If there are more than 25 accountants, the firm will have to rent a larger building and the fixed cost will increase.

Cost of Goods sold formula

beginning inventory + purchases - ending inventory

Choosing a cost structure that relies heavily on fixed costs will ______.

cause earning to fluctuate more than a structure that relies heavily on variable costs

R² represents the percentage of change in ______.

dependent variable TOTAL COST that is explained by a change in the independent variable UNITS SOLD

relevant costs

describes avoidable costs that are incurred only when making specific business decisions. The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process.

Manufacturing Cost

direct materials, direct labor, manufacturing overhead

Fixed costs ----

increase risk by adding operating leverage

Risk ----

is the possibility that sacrifices may exceed benefits

Assume a company has a revenue of $900, variable costs of $600, net income of $50, and fixed costs of $250. What is the magnitude of operating leverage?

magnitude of operating leverage = contribution margin / net income $300/$50=6

Variable costs do not offer ---- leverage

operating

Which of the following is a disadvantage of the high-low method?

prone to inaccuracy

What happens when activity level increases?

total variable cost increases AND variable cost per unit remains constant.

An income statement prepared using the contribution margin approach classifies costs as ______.

variable and fixed

Sam Company sells dog toys priced at $12. The variable cost per unit is $3 and the fixed cost per unit is $1. Contribution margin per unit is ______.

$12 - $3 = $9 **subtract per unit variable cost from price

A scattergraph shows that total cost at 5,000 units is $100,000. The scattergraph line intersects the Y axis at $20,000. What is variable cost per unit?

($100,000 - $20,000) ÷ 5,000 = $16

Sam Company sells dog toys priced at $12. The variable cost per unit is $3 and the fixed cost per unit is $1. If Sam sells 100 dog toys, the total contribution margin is ______.

($12 - $3) × 100 = $900

Assume a company estimates they will sell 300 units. What is the percentage change in units if actual sales are 450 units?

(Alternative measure - Base measure) ÷ Base measure = Percent change: (450 - 300) ÷ 300 = 50%.

Assume a company sold 100 units in Year 1 and 300 units in Year 2. What is the percentage change in units sold from Year 1 to Year 2?

(Alternative measure-Base measure)/Base measure= Percent change (300-100)/100=2 Converting 2 to a percentage becomes 200%.

Cost of Goods manufactured formula

(direct materials + direct labor+ factory overhead)+(Begin. WIP inv. - ending WIP inv.)

The amount available after all variable expenses are deducted is the ---

**The contribution margin represents the amount available to cover fixed expenses and thereafter to provide company profits Contribution margin: resulted subtotal when variable costs are subtracted from revenue Net income is computed by subtracting the fixed costs from the contribution margin.

Assume that a company's magnitude of operating leverage is 2. A 10% increase in revenue will lead to what percentage increase in net income?

- 10% * 2= 20% **multiply the percent increase by magnitude of operating leverage to get the percentage increase in net income

GAAP prohibit using the contribution margin income statement format in ---- financial reports.

- External/public Contribution margin style income statement cannot be used for public reporting, NOT ALLOwed in EXTERNAL, but is widely used for internal reporting purposes.

If a firm has high operating leverage, a small change in revenue will lead to ______ change in profitability.

- a large Operating elverage used to magnify small changes in revenue into dramatic changes in profitablility -

Process Flow Structure: job shop

- flexible operation that has several activities through which work csn pass - not necessary for all activities to be preformed on all products + sequence may be different for different products - i.e print shop

Process Flow Structure: batch

- i.e. bakery - similar to job shop, but the sequence of activities tends to be in a line and is less flexible - products are produced in batches for example to fill specific customer orders

Process Flow Structure: continuous flow

- i.e. oil refinery - fixed pace and fixed sequence of activities - the product is processed in a cont. flow and quantity tends to be measured in weight or volume.

The contribution margin income statement is used for ______ reporting.

- internal **GAAP prohibits its use for external reporting

period cost

- operating cost that is expensed in the accounting period in which it is incurred - not tied to or related to the production of inventory - SG&A expenses, marketing expenses, CEO salary, and rent expense relating to a corporate office

Idle Time

- refers to the labor time oaid for but not utilized on production idle time= total time spent by a worker - actual time spent of production **treated as indirect labor cost and should be included in manufacturing overhead cost

Manufacturing Overhead

- rent of production building, property taxes and insurance on manufacturing facilities and equipment - salaries of maintenance personnel, depreciation on manufacturing equipment, - expenses at the sale of products; included in the per-item cost of doing business

What happens when activity level decreases?

- variable cost per unit remains constant - total variable cost decreases

Process Flow Structure: assembly line

-i.e. automobile production line

R² ranges from __ to __percent.

0-100

Assume that a company's magnitude of operating leverage is 10. A 1% increase in revenue will lead to what percentage increase in net income?

1*10=10 % increase

Which of the following statements is (are) correct? A. Overtime premiums should be treated as a component of manufacturing overhead. B. Overtime premiums should be treated as a component of direct labor .C. Idle time should be treated as a component of direct labor. D. Idle time should be accounted for as a special type of loss. E. Overtime premiums should be treated as a component of direct labor and idle time should be treated as a component of direct labor.

A only. Overtime permiums should be treated as a component of manufacturing overhead

True or false: Least-squares regression is preferable to a scattergraph because it can calculate actual fixed and variable costs.

False; Least-squares regression is still an estimate. It is preferable to a scattergraph because it is more accurate.

Earnings fluctuations are more likely if ______ costs are high.

Fixed - Fixed costs can make earnings fluctuate more. higher levels of fixed costs are more likely to experience earning volatility - companies can sell the same number of products for the same amount of money but have different cost structures

Assume a concert hall that seats 5,000 costs $10,000 to rent. The cost of the concert rent is ______.

Fixed from 1-5000 attendees. **The rent cost is fixed as long as the number of attendees is between 1 and 5,000. More attendees would require a larger concert hall and the fixed cost would increase.

High-Low Method

High-low is based on the highest and lowest volume, not costs. ($2,000 - $600) ÷ (190 - 40) = $9.33 ***the variable cost per unit is the difference between the total cost at the high- and low-volume points divided by the difference between the corresponding high and low volumes. The fixed cost component is determined by subtracting the variable cost from the total cost at either the high- or low-volume level.

Multiple regression explains the dependent variable with ______ independent variable(s).

More than one **multiple regression analysis: statistical tool that permits analysis of how a number of independent variables simultaneously affect a dependent variable .

The possibility that sacrifices may exceed benefits is called ______.

Risk - refers to the possibility that sacrifices may exceed benefits - fixed cost= commitment to an economic sacrifice - "ultimate risk of undertaking a particular business project"

Which of the following is an advantage of the high-low method?

The chief advantage is its simplicity; chief disadvantage is its vulnerability to inaccuracy **This method is a rough estimate and is vulnerable to inaccuracy.

The primary difference between regression and multiple regression is that in multiple regression there are multiple ______ variables.

There is always only one dependent variable which is the variable you are trying to explain (i.e. Total Cost).

Fixed and variable costs always remain fixed or variable at all ranges of activity.This is only true within the relevant range of activity.

This is only true within the relevant range of activity.

Using the high low method we estimated fixed costs to be $100,000 and variable costs to be $15 a unit. If 10,000 units are produced what is total cost?

Total Cost = $100,000 + ($15 x 10,000)

True or false: Fixed costs increase risk.

True: Fixed costs increase risk by adding operating leverage.

True or false: If the activity level increases, variable cost per unit remains constant.

True; ** Total variable cost varies with the activity level, but variable cost per unit remains constant.

To reduce risk, a company should reduce operating leverage by utilizing a(n) ---- cost structure.

Variable **Shifting the cost structure from fixed to variable reduces not only the level of risk but also potential for profits - variable costs do not offer operating leverage - variable cost structure reduces risk but limits the opportunity to benefit from operating leverage

Absorption (full) costing

a method of costing in which product costs include the costs of direct materials, direct labor, and fixed and variable overhead; required for external financial statements and for income tax reporting

Changing the activity base:

can change a variable cost to a fixed cost AND can change a fixed cost to a variable cost; When identifying a cost as fixed or variable, first ask, fixed or variable RELATIVE to what activity base? The cost of the band is fixed relative to the # of tickets sold for a specific concert; it is variable relative to the number of concerts produced.

Production Cost

combined costs of raw material and labor incurred in producing goods

The amount available to cover fixed expenses and thereafter provide company profits is the

contribution margin - subtract variable costs from revenue - demonstrates impact of cost structure

True or false: If the activity level increases, fixed cost per unit remains constant.

false

A cost that does not change regardless of volume is a ______ cost.

fixed

If a change in volume does not affect the total cost, the cost is defined as a(n) ---- cost.

fixed

On a contribution margin income statement, net income is calculated as contribution margin minus

fixed

On a scattergraph, the point where the visual fit line intercepts the Y axis is ______ cost.

fixed

Total variable cost ---- proportionately when activity increases.

increases/rises

variable costing

only includes variable product costs - variable products costs subtracted from sales revenue to determine the contribution margin fixed costs are tehn subtracts from the contribution margin ot determine net income **fixed manufactuing costs are expensed in the period in which they are incurred (the period which the resource is used) regardless of when inventory is sold. **increase in production have no effect on the amount of reported profit using variable costing **management encourage to make decisions that have a more favorable impact on long-term profitability

The ability of fixed costs to magnify changes in sales to create disproportionate changes in profitability is called ---- leverage.

operating

The range of activity over which the definition of fixed and variable costs are valid is called the ______ range. Multiple choice question.

relevant???

Which of the following situations would not be appropriate to calculate average cost per unit over a one day period?

sales volume fluctuates greatly day to day **if sales volume does not change, the calculation of cost per unit will not change.

A cost that has both a fixed and variable component is called a(n) ---- cost.

semivariable/mixed

Using least-squares regression instead of a scattergraph is preferable because it ______.

statistical producure; better because scattergraph is subject to human error. More complicated but more accurate **Like the scattergraph, least-squares regression only provides an estimate of fixed and variable costs.

Coversion Cost

term the represents the combination of direct labor costs and manufacturing overhead costs. **manufacturer's product/production costs other than the cost of a product's direct materials.

On a scattergraph the fixed cost is ______.

the fixed cost is the point where the visual fit line intersects the vertical axis/total cost line/y axis (slope of the line is the variable cost per unit)

Direct Labor Costs

the wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods - salaries and wages that can be directly attributed to specific products/services

Assume the following: 1) the scattergraph intersects the Y axis at $100; 2) the estimated line on the scattergraph increases by $5 for every 1 unit of volume increase. What is total cost if volume is 0?

total cost = 100 + (5* 0 units). You still have fixed cost even if volume is 0.

Prime Cost

total direct costs of production, including raw materials and labor, - Indirect costs (ulilitites, manager salaraies, delivery costs) are NOT included in prime costs. **prime cost=cost of raw materials + direct labor

Overtime Premiums

treated as direct labor cost and charge to production on the same basis as time worked during normal hours but the premium paid during the overtome period is not a direct charge against productio but recovered as production overhead throuhg pverhead recovery rate **can also be charged as direct labour cost to a specific job if overtime is worked on a specific job to meet time scheduales or carry out specific rush orders for which extra price is covered.

A cost that changes proportionately in total as the activity level changes is a ______ cost.

variable

The activity base is used to determine ______.

whether a cost is defined as fixed or variable