ACCY 200 Chapter 12

Examples of fixed costs

- Supervisor's salary - Factory rent - Advertising - Property Taxes -Sales Manager's salary

Which of the following equations describes the breakeven point?

Contribution margin = Fixed expenses Total revenue = Total expenses Operating income = Zero

As compared to a traditional income statement format, which of the following terms do not appear on the contribution margin format income statement?

Operating expenses.

variable cost

a cost that changes in total as the volume of activity changes

production standard

expected or allowed times and costs to make a product or perform an activity

As the level of activity decreases:

fixed cost remains constant in total.

cost behavior pattern

identification of whether a cost is fixed or variable

When the number of units sold is below the breakeven point,

loss equals each unit unsold below the breakeven point multiplied by the contribution margin per unit.

The contribution margin format income statement:

uses a behavior pattern classification for costs rather than a functional cost classification approach.

Managerial accounting, as compared to financial accounting:

uses frequent and prompt control reports.

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

True or false: Cost behavior implies that people accountable for costs would react negatively to increases in the cost.

False

Which of the following elements are included in the contribution margin income statement format?

Fixed expenses Operating income Variable expenses Revenues Contribution margin

From the following cost examples, identify those that are variable costs.

Hourly wages Production supplies Sales commissions Shipping cost Warranty Costs

Breadth of concern (managerial vs Financial)

Managerial: Micro- individual units of the organization plan & act Financial: Macro- Financial statements are for the organization as a whole

Arrange the following items on the contribution margin income statement in the correct order.

Revenue, Variable Expense, Contribution Margin, Fixed Expense, Operating Income

The management process is illustrated through a series of management key activities referred to as:

The planning and control cycle

True or false: Managerial accounting provides information for use within an organization.

True

True or false: Operating leverage should inform management's decisions about whether to incur variable costs or fixed costs in its cost structure.

True

As the volume of activity changes, a(n) (...) cost remains constant when expressed on a per unit basis.

Variable

fixed cost

a cost that does not change in total as the level of activity changes within the relevant range

semivariable cost

a cost that has both fixed and variable elements; a mixed cost

The relevant range assumption relating to fixed costs refers to:

a firm's range of activity

managerial accounting

accounting that uses economic and financial information to plan and control many activities of the entity and to support the management decision-making process; sometimes called management accounting

A cost behavior pattern describes the relationship of total cost to volume of (...)

activity

In the planning and control cycle, feedback is obtained by comparing planned activity (...) with results.

actual

cost formula

an algebraic expression that reflects the fixed and variable elements of a cost

contribution margin format

an income statement format in which variable costs are subtracted from revenues to show contribution margin, from which fixed costs are subtracted to determine operating income

cost-volume-profit (CVP) analysis

analysis of the impact on profit of volume and cost changes using knowledge about the behavior pattern of the costs involved

The relevant range assumption is about (...) and suggests that the level of fixed costs will remain constant only within certain ranges of activity.

capacity

In managerial accounting, the term (...) means different things depending on the situation.

cost

A traditional income statement format is organized by function, whereas a contribution margin format income statement is organized by

cost behavior

The term to describe the concept that costs increase or decrease with changes in the volume of activity is known as:

cost behavior

The contribution margin format income statement is organized by:

cost behavior classifications.

Cost behavior refers to:

costs that are variable or fixed.

The management activity that occurs in each phase of the planning and control cycle is:

decision making

As the volume of activity changes, a(n) (...) cost changes when expressed on a per unit basis.

fixed

In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?

fixed manufacturing overhead that cannot be avoided.

The scattergram allows cost-volume relationships to be visually scanned for outlier observations that should be:

ignored in the calculation of the cost formula of a mixed cost.

A company's margin of safety calculation is an indication of how closely the company is operating relative to __________.

its breakeven point

The higher a firm's contribution margin ratio, the greater its operating:

leverage

What kind of accounting provides information to support an organization's planning, control and decision-making needs

managerial

Reporting Standards (Managerial vs Financial)

managerial: None because of internal & pragmatic orientation financial: Imposed by generally accepted accounting principles & the FASB

time frame (managerial vs. financial)

managerial: Present & future for planning & control financial: financial statements are historical

Degree of Precision of data used(managerial vs. financial)

managerial: Reasonable accuracy desired, but "close counts"-- relevance is often more important than reliability financial: High accuracy desired, with time usually available to achieve it-- reliability is of utmost importance

service perspective (managerial vs. financial)

managerial: internal to managers financial: external to investors and creditors

Reporting Frequency & promptness (managerial vs. financial)

managerial: issued frequently (daily) & promptly financial: monthly or weekly, a week or more after month-end

A relative measure of risk that describes a company's current sales performance in relation to its break-even sales is called the _____.

margin of safety

Managerial accounting provides information for:

planning, control, and decision-making

The logical sequence of activities performed in the management planning and control cycle is:

planning, managing, and controlling

management process

planning, organizing, and controlling the activities of an organization so it can accomplish its purpose

When the number of units sold is above the breakeven point,

profit equals units sold above the breakeven point multiplied by the contribution margin per unit.

If the selling price and variable expense per unit were to drop $2 and fixed expenses remain the same, the breakeven point would __________.

remain the same The contribution margin remains the same and hence no change in breakeven point.

The high-low method of analyzing the cost behavior of a mixed cost uses a(n) (...) to illustrate cost and volume data relationships.

scattergram

Which of the following cost classifications would not be considered relevant in comparing decision alternatives?

sunk cost.

indifference point

the activity level that produces the same total cost when two different cost formulas or cost structures exist

margin of safety

the amount by which current sales exceed break-even sales, providing a relative measure of risk before an operating loss would be incurred

break-even point

the amount of revenue required to have neither operating profit nor operating loss

operating leverage

the concept that operating income changes proportionately more than revenues for any change in the level of activity given the relative trade-off of variable versus fixed costs in a firm's cost structure

contribution margin

the difference between revenues and variable costs

A firm calculates the average contribution margin ratio when _____.

the firm sells more than one product

sales mix

the proportion of total sales represented by various products or categories of products

relevant range

the range of activity over which the fixed or variable cost behavior pattern exists

contribution margin ratio

the ratio of contribution margin to revenues

As the total volume of activity changes:

the total of variable costs changes.

If a manager is to be held responsible for costs incurred by a unit of the organization

then the financial results reported for that unit should never include costs incurred by other units that have been arbitrarily assigned to the manager being evaluated

At the breakeven point, operating income is equal to (...)

zero