AC204 • Exam 2 • Chapters 5, 6, 13

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

Product costs under absorption costing include ______.

direct materials direct labor fixed manufacturing overhead variable manufacturing overhead

When constructing a CVP graph, the vertical axis represents:

dollars.

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

When using variable costing, fixed manufacturing overhead is ______.

expensed in the period incurred

Absorption costing net operating income may not agree with the net operating income calculated for CVP analysis due to the way in which ______ is handled in absorption costing.

fixed manufacturing overhead

Under variable costing the cost of a unit of inventory does not contain:

fixed manufacturing overhead.

The difference between reported net income on variable costing and absorption costing income statements is based on how ________.

fixed overhead is accounted for

Contribution margin is first used to cover __________ expenses. Once the break-even point has been reached, contribution margin becomes ___________.

fixed; income

Absorption costing net income is calculated by subtracting selling and administrative expenses from

gross margin

An absorption costing income statement calculates ______.

gross margin by deducting cost of goods sold from sales

The company-wide break-even sales will always be ______ the sum of the segment break-even sales.

higher than

When units sold exceed units produced, net income under variable costing will generally be ______ net income under absorption costing.

higher than

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

higher under absorption costing than under variable

When inventory increases, which costing method generally results in higher net income?

Absorption costing

Costs are categorized by function when using __________ costing and by behavior when using _________ costing.

Absorption; variable

Variable costing income statements are based upon a ______ format.

contribution

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in

contribution margin

After reaching the break-even point, a company's net operating income will increase by the _________ ________ per unit for each additional unit sold.

contribution margin

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative

income statement

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ______ in total as the number of units produced increases.

increase

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN?

2,800

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales Blank______.

net operating income will increase by $0.70 total contribution margin will increase by $0.70

If a segment is entirely eliminated, common fixed costs will ______.

not change

Segment break-even calculations include ______ fixed expenses.

only traceable

Variable costing treats fixed manufacturing overhead as a(n)

period

Decision-making problems that could occur when using absorption costing include inappropriate ______ decisions, and decisions made to ______ products that are, in fact, profitable.

pricing; drop

When a segment cannot cover its own costs, that segment should ______.

probably be dropped

When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units

produced

When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead cost divided by units:

produced

Absorption costing treats fixed manufacturing overhead as a _____ cost.

product

The contribution margin as a percentage of sales is referred to as the contribution margin or CM

ratio

Differential revenue is an example of a(n) ______ benefit.

relevant

The variable expense ratio is the ratio of variable expense to ______.

sales

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by ______.

$174,000

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be

$30

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be

$5,000

The break-even point is the level of sales at which the profit equals

0

Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is

45%

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ______.

A contribution margin equal to fixed costs Reached the break-even point

Under absorption costing, fixed manufacturing overhead costs:

Are deferred in inventory when production exceeds

Grant Corporation has no beginning inventory and manufactures a single product. If the number of units produced exceeds the number of units sold, then net operating income under the absorption method for the year will:

Be greater than the net operating income under the variable costing.

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

CVP Analysis

Which of the following is NOT a common mistake made in preparing segmented income statements?

Computing contribution margin instead of gross margin.

CVP

Cost Volume Profit

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

Decrease in the unit variable cost

Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

Some decisions have only one alternative and cannot consider steps in decision making.

False

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

False

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False

Two companies with the same margin of safety in dollars will also have the same total contribution margin.

False

Absorption and variable costing net income are usually different due to the accounting for ________.

Fixed manufacturing overhead

Which of the following items are found above the contribution margin on a contribution margin format income statement? Fixed Expenses, Sales, Net Operating Income, Variable Expenses

Sales and variable expenses

Which of the following should not be included in the analysis when making a decision?

Sunk costs Non-differential future costs

At the break-even point ______.

Total revenue equals total cost Net operating income is zero

A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

In a Cost-Volume-Profit graph (sometimes called a break-even chart), unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis.

True

The costs assigned to units in inventory are typically lower under variable costing than under absorption costing.

True

Variable manufacturing overhead costs are treated as product costs under both absorption and variable costing.

True

Break-even analysis assumes that:

Unit variable expense is constant.

Financial statement users need to be aware of changes in inventory levels when using

absorption

Net income computed under ______ costing may not agree with the results of CVP analysis.

absorption

The two general costing approaches used by manufacturing companies to prepare income statements are

absorption costing and variable costing.

For external reporting, income statements are generally prepared using _________ costing, while ________ costing is used for internal decision making purposes.

absorption; variable

A cost that can be eliminated by choosing one alternative over another is a(n)

avoidable cost

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n)

avoidable cost

Generally speaking, net operating income under variable and absorption costing will:

be equal only when production and sales are equal.

Contribution margin

becomes profit after fixed expenses are covered.

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

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

A segment should probably be dropped when the segment ______.

cannot cover its own costs has a contribution margin that cannot cover traceable fixed costs

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit

When making a decision using incremental analysis consider the ______.

change in cost resulting specifically from the decision change in sales dollars resulting specifically from the decision

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______.

change in sales dollars × contribution margin ratio

If a segment is eliminated, ___ fixed costs that are not traced to the segment will not change.

common

When a segment is eliminated, a _______.

common fixed cost will remain unchanged traceable fixed cost will disappear

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease

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

decreases

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will ______.

increase by $24,000

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using

incremental analysis

An increase in cost between two alternatives is a(n)

incremental cost

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

irrelevant

A traceable fixed cost ______.

is incurred because of the existence of the segment

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

keep

The amount by which sales can drop before losses are incurred is the

margin of safety

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

more than

Assigning common fixed costs to segments impacts ______.

segment margin only

CVP analysis focuses on how profits are affected by ______.

selling price mix of products sold total fixed costs sales volume unit variable cost

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

sunk

Irrelevant costs include:

sunk costs future costs that do not differ between alternatives

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ______.

the contribution margin per putter is $65. the sale of 12,000 putters results in net operating income of $380,000

When making a decision, only relevant items are included in the analysis of the alternatives when using

the differential cost approach

When calculating the profit impact of discontinuing a segment, consider ______.

the segment's traceable fixed costs the segment's contribution margin

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

The break-even point is reached when the contribution margin is equal to

total fixed expenses.

The segment margin equals the segment's contribution margin less the segment's

traceable fixed costs

When preparing a segment margin income statement:

traceable fixed expenses are deducted from contribution margin. cost of goods sold consists of only variable manufacturing costs.

Using absorption costing for segmented income statements can lead to:

under-costing of segments. omission of upstream and downstream costs.

Activities ranging from development to production to after-sales service are called a(n)

value chain

The contribution margin equals sales minus all ______ expenses.

variable

The variable costing income statement separates ______.

variable and fixed expenses

The number of units produced does not affect net operating income when using

variable costing

Variable expenses ÷ Sales is the calculation for the

variable expense