ACCT 2 - Exam 2 Review

Absorption costing _____

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

Degree of operating leverage equals

Total Contribution Margin/ Net Operating Income

The formula to calculate the variable cost per unit using the high-low method is

difference in total cost divided by difference in activity

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

fixed costs

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

higher than

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

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

least squares regression

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

least squares regression

Differences in profit between absorption and variable costing can occur in

manufacturing companies only

The excess of the budgeted (or actual) sales dollars over break-even sales is called the

margin of safety

Nonmanufacturing costs are

never reported as inventory (Nonmanufacturing costs are reported in BOTH full absorption and variable costing)

If fixed costs are zero, the degree of operating leverage will be

one (If fixed costs are zero, the degree of operating leverage (DOL) will be exactly one, meaning there is a one-to-one relationship between contribution margin and net income.)

The weighted average unit contribution margin is the average unit contribution margin of multiple products weighted according to

percentage of units sold

According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases.

price

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

relevant range

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.

sales mix

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

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

within the relevant range

The goal of break-even analysis is to find the level of sales where profit is equal to

zero

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 DM + DL + Variable MOH + (Fixed MOH/ Units Produced) = Unit Product Cost Using Absorption Costing Method

Given the following information, calculate the unit product cost under variable costing. Direct materials: $50/unit Direct labor: $75/unit Variable manufacturing overhead: $27/unit Fixed manufacturing overhead: $30,000 Variable selling and administrative: $8 per unit Fixed selling and administrative: $10,000 Units produced: 10,000 Units sold: 6,000

$152 DM + DL + Variable MOH = Unit Product Cost Using Variable Costing

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 Variable selling and administrative: $8/unit Fixed selling and administrative: $10,000 Units produced: 10,000 Units sold: 6,000

$155 DM + DL + Variable MOH + (Fixed MOH / Units Produced) = Unit Product Cost Using Absorption Costing

A company sells two products. Product A sells for $10.00 per unit and Product B sells for $8.00 per unit. Variable costs are $3.00 for Product A and $2.50 for Product B. If the sales mix is 70% Product A and 30% Product B, the weighted average contribution margin is

$6.25 Weighted Average Contribution Margin Ratio= (Sales Price - Variable Cost) * Sales Mix + (Sales Price - Variable Cost) * Sales Mix

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?

$9000 Sales Price - Variable Cost = Contribution Margin * Additional Units = Increased Profit Amount

Which of the following statements are true?

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

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 are assumptions of cost volume profit analysis?

-Production volume is equal to sales volume. -In multi-product companies, the sales mix is constant. -All costs can be classified as either fixed or variable.

Which of the following statements are true?

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

Which of the following statements are true?

-The relevant range of activity is approximated by a straight line. -Within the relevant range of activity, fixed costs remain constant in total. -Outside of the relevant range, cost behavior conclusions may not be valid.

Step costs _____

-are fixed over some range of activity -may be either step-fixed or step-variable

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

CVP ______.

-can be used for "what-if" analysis -can be used to make many different decisions -allows managers to see how changing one variable can impact another

Absorption costing and variable costing net operating income will be _____.

-equal when there is no beginning and no ending inventory -equal when the number of units produced equals the number of units sold

The weighted average unit contribution margin

-is based on the relative percentage of each unit sold -is used instead of the single product contribution margin in ----multi-product break-even analysis assumes that the percentage of each product sold is constant

The high-low method ______.

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

Webster, LLC sells its product for $20 per unit. Variable costs are $11 per unit and total fixed costs are $35,000. The company sells 8,000 units per year. Webster's contribution margin ratio is

45% Sales Price - Variable Cost Per Unit = Contribution Margin / Sales Price = Contribution Margin Ratio

Given sales of 10,000 units per month, sales price per unit of $4.00, variable costs of $1.80 per unit and and total fixed costs of $5,000, the contribution margin ratio is

55% Contribution Margin Ratio = (Sales Price - Variable Costs)/ Sales Price

A company sells two products. Product A sales total $28,000 and Product B sales total $12,000. Total contribution margin is $18,000 for Product A and $9,000 for Product B. The weighted average contribution margin ratio is

67.5% Weighted Average Contribution Margin Ratio = Total Contribution Margin/ Total Sales Revenue

Which of the following may not represent the general trend in the data?

The high-low method

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

CVP analysis is only used for break-even and target profit analysis.

False

Nonmanufacturing costs are reported as inventory when using full absorption costing.

False

Cost structure refers to how a company uses product and period costs in an organization.

False (Cost structure refers to how a company uses FIXED and VARIABLE costs in an organization.)

Variable costing _____

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

When performing a multiproduct CVP analysis, the weighted-average contribution margin per unit is computed using the the _____ mix is used to compute the weighted-average contribution margin ratio.

Product Mix

The equation for the profit equation method is

Profit= Total Sales Revenue - Total Variable Costs - Total Fixed Costs

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

Relevant range analysis

the _______ is used to compute the weighted-average contribution margin ratio.

Sales Mix

The key to most managerial decision is understanding cost behavior.

True

The format used to prepare a contribution income statement is Sales -

Variable expenses = Contribution margin - Fixed expenses = Net income

Contribution margin equals sales minus

all variable costs (Product AND Period Costs)

Step-fixed costs _____

are fixed over a fairly wide range of activity

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

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

contribution margin income statement

How much contribution margin is generated per dollar of sales revenue is the

contribution margin ratio

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

cost behavior

The extent to which a company uses fixed costs (as opposed to variable costs) in its operations is called

cost structure

When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will

decrease (An increase in selling price increases contribution margin and decreases the break-even point.)

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

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

the variable cost per unit

Differences in net operating income between absorption costing and variable costing are due to the

timing of when fixed manufacturing overhead is expensed

In the equation Y= a + bX, Y is the

total cost

The weighted-average contribution margin ratio is calculated using the

total sales mix

The amount each unit sold contributes towards fixed costs and profit is the

unit contribution margin

Contribution margin ratio is

unit contribution margin ÷ unit sales price

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

variable

When preparing a CVP graph, the slope of the total cost line represents

variable cost per unit

For internal decision making, it is best to use

variable costing