managerial accounting
Net operating income reported under absorption costing will exceed net operating income reported under variable costing for a given period if:
production exceeds sales for that period.
Sales budget
quarter expected unit sales unit selling price total sales
direct materials budget
required production x raw materials per unit = production needs + desired ending inventory - beginning inventory = raw materials to be purchased x cost per raw material = cost of raw material purchases
what drives all other budgets
sales
how do you get contribution margin per unit
sales - variable costs
how do you get contribution margin ratio
sales - variable costs / sales
Menlove Company had the following income statement for the most recent year: Sales(17,000 units)...........$367,000 Variable expenses...........255,000 Contribution margin.........102,000 Fixed expenses............... 68,000 Net operating income......$34,000 Given this data, the unit contribution margin was:
six per unit
Break-even analysis assumes that:
the average expenses per unit are constant
The difference between total sales in dollars and total variable expenses is called:
the contribution margin
All other things being equal, if a division's traceable fixed expenses increase:
the division's segment margin will decrease
All other things equal, if a division's traceable fixed expenses decrease:
the division's segment margin will increase
all other things equal, if a division's traceable fixed expenses decrease
the divisions segment margin will increase
A common cost that should not be assigned to a particular product on a segmented income statement is:
the salary of the corporation president
Over an extended period of time in which the final ending inventories are zero, the accumulated net operating income figures reported under absorption costing will be:
the same as those reported under variable costing.
how do you get fixed costs
total cost= FC + VC per unit (# of units)
A segment is any portion or activity of an organization about which a manager seeks revenue, cost, or profit data.
true
An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.
true
At the break-even point: Sales - Variable expenses = Fixed expenses.
true
Avoidable costs are relevant costs.
true
Fixed costs that are traceable to a segment may become common if the segment is divided into smaller units
true
Future costs that do not differ among the alternatives are not relevant in a decision.
true
If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.
true
If two companies have the same total sales and total expenses and make the same product, the volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.
true
Only those costs that would disappear over time if a segment were eliminated should be considered traceable costs of the segment.
true
Segmented statements for internal use should be prepared in the contribution format.
true
The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.
true
The salary of the treasurer of a corporation is an example of a common cost which normally cannot be traced to product segments.
true
The salary paid to a store manager is a traceable fixed expense of the store.
true
When a company has a production constraint, the product with the highest contribution margin per unit of the constrained resource should be given highest priority.
true
When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs deferred in inventory under absorption costing should be added to variable costing net operating income to arrive at the absorption costing net operating income.
true
a mixed cost contains both variable and fixed cost elements
true
for cap analysis, variable costs are assumed to have a linear relationship within the relevant range of activity
true
one of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is
true
the book value of old equipment is not a relevant cost in a decision
true
the high-low method provides a precise measurement of fixed and variable costs results which can be applied to most activity levels
true
variable costing is more compatible with cost-volume-profit analysis than is absorption costing
true
When production is less than sales for the period, absorption costing net operating income will generally be less than variable costing net operating income
true For absorption costing, if production is less than sales (inventory is depleted), fixed MOH is released from inventory reducing net operating income (NOI).
Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further.
true The joint costs are sunk (they can't be avoided).
direct labor budget
units to be produced x direct labor time per unit = total required direct labor hours =x direct labor cost per hour = total direct labor cost
segment margin is sales minus
variable costs and traceable fixed costs
Segment margin is sales minus:
variable expenses and traceable fixed expenses.
how do you get after tax net income
pretax net income + fc / contribution margin ratio
net operating income reported under absorption costing will exceed net operating income reported under variable costing for a given period if
production exceeds sales for that period
Mancuso Corporation has provided its contribution format income statement for January. The company produces and sells a single product. Sales(2,900 units)...........$269,700 Variable expenses...........107,300 Contribution margin.........162,400 Fixed expenses............... 137,100 Net operating income......$25,300 If the company sells 3,100 units, its total contribution margin should be closest to:
$173,600 CM $162,400 / 2,900 units = $56 CM per unit x 3,100 units = $173,600
Knoke Corporation's contribution margin ratio is 29% and its fixed monthly expenses are $17,000. If the company's sales for a month are $98,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.
$11,420 $98,000 sales x CM ratio .29 = $28,420 CM - $17,000 FC = $11,420
Zumpano Inc. produces and sells a single product. The selling price of the product is $170.00 per unit and its variable cost is $73.10 per unit. The fixed expense is $125,001 per month. The break-even in monthly dollar sales is closest to
$170 sales - $73.10 VC = $96.9 CM per unit; $96.9 / $170 = .57 CM ratio $125,001 FC / .57 CM ratio = $219,300 BE sales
Mark Company currently sells a video recorder with a selling price of $300 per unit. The variable expense per unit is $175 and fixed expenses are $100,000. If the company reduces variable expenses by $20 per unit and increases the fixed expenses by $10,000, the break-even point will increase.
$300 Sales - $175 VC = $125 CM unit ; $100,000 fixed costs / $125 = 800 units & $300 sales - $155 VC = $145 CM unit ; $110,000 fixed costs / $145 = 759 units.
Dimitrov Corporation, a company that produces and sells a single product, has provided its contribution format income statement for July. Sales(7,000 units)...........$315,700 Variable expenses...........175,000 Contribution margin.........140,000 Fixed expenses............... 103,500 Net operating income......$36,500 If the company sells 6,900 units, its net operating income should be closest to:
$34,500 $140,000 CM / 7,000 units = $20 CM per unit x 6,900 units = $138,000 CM - FC $103,500 = $34,500
The variable expense per unit is $12 and the selling price per unit is $40. Then the contribution margin ratio is 70%.
$40 - $12 = $28 / $40 = 70%
Hirt Corporation sells its product for $12 per unit. Next year, fixed expenses are expected to be $400,000 and variable expenses are expected to be $8 per unit. How many units must the company sell to generate net operating income of $80,000?
120,000 units Sales $12 - VC $8 = $4 CM per unit (FC $400,000 + TNI $80,000) / $4 CM per unit = 120,000 units
Butteco Corporation has provided the following cost data for last year when 100,000 units were produced and sold: Raw materials.......................................$200,000 Direct labor...........................................$100,000 Manufacturing overhead.......................$200,000 Selling and administrative expense......$150,000 All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expense. There are no beginning or ending inventories. If the selling price is $10 per unit, the net operating income from producing and selling 110,000 units would be:
$405,000 RM $200,000 / 100,000 units= $2 per unit DL $100,000 / 100,000 units = $1 per unit MOH $200,000 - 100,000 fixed MOH = $100,000 variable MOH / 100,000 units = $1 per unit SGA $150,000 - $100,000 fixed SGA = $50,000 variable SGA / 100,000 units = $0.50 per unit Sales $10 per unit - VC $4.5 per unit ($2 RM + $1 DL + $1 MOH + $0.50 SGA) = $5.5 CM per unit $5.5 CM per unit x 110,000 units = $605,000 CM - FC $200,000 ($100k MOH + $100k SGA) = $405,000
Last year, Flynn Company reported a profit of $70,000 when sales totaled $520,000 and the contribution margin ratio was 40%. If fixed expenses increase by $10,000 next year, what amount of sales will be necessary in order for the company to earn a profit of $80,000?
$570,000 $520,000 sales x 40% CM ratio = $208,000 CM - FC = $70,000 profit this year; Solving for FC, we get $138,000 ($208,000 - 70,000). To get required sales to earn $80,000 profit this year, we take (FC $138,000 + $10,000 increase + $80,000 TNI ) / 40% CM ratio = $570,000
The contribution margin ratio of Lime Corporation's only product is 75%. The company's monthly fixed expense is $688,500 and the company's monthly target profit is $20,000. The dollar sales to attain that target profit is closest to:
$944,667 FC $688,500 + $20,000 TNI ) / .75 CM ratio = $944,666.7
Which of the following formulas is used to calculate the contribution margin ratio?
(Sales - Variable expenses) ÷ Sales
the margin of safety percentage is computed as:
(Total sales - Break-even sales) Total sales
Which of the following are considered to be product costs under absorption costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses.
1, 11
Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per unit, and the fixed expenses total $35,000 per period. By how much will net operating income change if sales are expected to increase by $40,000?
16000 increase $40,000 increase in sales x 40% CM ratio = $16,000 change in profit
Smith Company sells a single product at a selling price of $30 per unit. Variable expenses are $12 per unit and fixed expenses are $41,400. Smith's break-even point is:
2,300 units Sales $30 - VC $12 = $18 CM per unit ; FC $41,400 / $18 CM per unit = 2,300 units
A product sells for $20 per unit and has a contribution margin ratio of 40 percent. Fixed expenses total $240,000 annually. How many units of the product must be sold to yield a profit of $60,000?
37,500 units Sales $20 per unit x 40% CM ratio = $8 CM per unit (FC $240,000 + TNI $60,000) / $8 CM per unit = 37,500 units
what is a budgeted balance sheet
A projection of financial position at the end of the budget period.
cash budget
Beginning cash balance + Cash receipts (itemized) -Cash disbursements (itemized) = Preliminary balance + Borrowing -Repayment of loan = Ending cash balance
budgeted balance sheet
Cash Accounts receivable Finished goods inventory Raw materials inventory Buildings & Equipment Less: Accumulated Depreciation Total assets
what is a direct labor budget
Estimated quantity and cost of direct labor to be incurred to meet production requirements
what is a direct materials budget
Estimated quantity and cost of direct materials to be purchased to meet production needs.
merchandiser's purchases budget
Expected sales (units) + Desired ending inventory (units) -Beginning inventory (units) = Purchases required (units) x Merchandise price per unit = Cost of merchandise purchases
In January you expect to sell 100 chairs and February 150 chairs for $45 each. On December 31st, you had 20 chairs in inventory. You want to always keep 10% of next month's expected sales in inventory as safety stock. Prepare a production budget for January
Expected unit sales + Desired ending inventory -Beginning inventory Required production (units)
what is a production budget
Number of units that must be produced to meet estimated sales and maintain desired inventory.
In responsibility accounting, each segment in an organization should be charged with the costs for which it is responsible and over which it has control plus its share of common organizational costs.
Under responsibility accounting, common fixed costs should not be included. Only controllable or direct costs should be included.
direct materials budget
Required Production (units) x Raw materials needed per unit (bdft) = Production needs (bdft) + Desired end. inventory (bdft) -Beginning inventory(bdft) = Raw materials to be purchased(bdfeet) x Cost per raw material (per bdft) = Cost of Raw Materials Purchase
budgeted income statement
Sales Cost of goods sold (15,000 x $44) Gross profit Selling & administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income
manufacturing overhead budget
Variable Costs Indirect materials Indirect labor Utilities Maintenance Total variable Fixed costs Supervisory salaries DepreciationProperty tax and insurance Maintenance Total fixed total manufacturing overhead direct labor hours Manufacturing overhead rate per direct labor hour
selling and administrative budget
Variable CostsSales commissions Freight-out Total variable Fixed costs Advertising Sales salaries Office Salaries Depreciation Property taxes and insurance Total Fixed total selling and administrative
Selling and administrative expenses are considered to be:
a period cost under variable costing.
how do you get pre tax net income
after tax net income desired / 1- tax rate
Variable manufacturing overhead costs are treated as period costs under both absorption and variable costing.
false variable manufacturing overhead is a product cost under both absorption and variable costing.
If the number of units produced exceeds the number of units sold, then net operating income under absorption costing will:
be greater than net operating income under variable costing.
cash budget
beginning cash balance + cash receipts - cash disbursements = preliminary balance + borrowing - repayment of loan = ending cash balance
In an income statement segmented by product line, a fixed expense that cannot be allocated among product lines on a cause-and-effect basis should be:
classified as a common fixed expense and not allocated.
The degree of operating leverage can be calculated as:
contribution margin divided by net operating income.
Under variable costing, all variable costs are treated as product costs.
false Variable costing product costs include direct materials, direct labor & variable manufacturing overhead. It doesn't include fixed manufacturing overhead or variable selling and administrative costs.
To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.
false When fixed costs are expressed on a per unit basis, managers often make poor decisions because they forget to disentangle the variable and fixed costs per unit.
merchandising budget
expected sales + desired ending inventory - beginning inventory = purchases required x merchandise price per unit = cost of merchandise purchases
how do you get margin of safety
expected sales - break even in sales
production budget
expected unit sales + desired ending inventory - beginning inventory = required production
Depreciation expense on existing factory equipment is generally relevant to a decision of whether to accept or reject a special offer for a company's product.
false
Fixed costs are irrelevant in a decision
false
Generally, a product line should be dropped when the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost.
false
If fixed expenses increase by $10,000 per year, then the level of sales needed to break even will also increase by $10,000.
false
Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.
false
Managers should not authorize working overtime at a work station that contains a bottleneck.
false
The book value of a machine, as shown on the balance sheet, is relevant in a decision concerning the replacement of that machine by another machine.
false
The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.
false
The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin ratio
false
a cost that will be incurred regardless of which course of action a manager takes is relevant to the manager's decision
false
a differential cost is a variable cost
false
contribution margin is the amount of profit remaining after deducting cost of goods sold
false
in responsibility accounting each segment in an organization should be charged with the costs for which it is responsible and over which it has control plus its share of common organizational costs
false
max company's break even point is 2000 units, its contribution margin per unit is 2 and its selling price per unit is 12. if the company sell 10 more units its net income will be 4000
false
opportunity costs are recorded in the accounts of an organization
false
the break-even point is the point at which total sales equal total contribution margin
false
the relevant range of activity is the activity level at which the company makes the highest amount of profits
false
under variable costing fixed manufacturing overhead cost is treated as a product cost
false
when production is more than sales for the period, absorption costing net operating income will generally be less than variable costing net operating income
false
when reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs deferred in inventory under absorption costing should be deducted from variable costing net operating income to arrive at the absorption costing net operating income
false
Under variable costing, fixed manufacturing overhead cost is treated as a product cost.
false Fixed manufacturing overhead is expensed as incurred under variable costing.
The unit product cost under absorption costing does not include fixed manufacturing overhead cost.
false Unit product costs under absorption costing include: DM + DL + Variable MOH + Fixed MOH.
Reynold Enterprises sells a single product for $25. The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales. The company's net operating income will increase by $5 if one more unit is sold.
false fixed costs do not increase as more units are sold
how do you get target net income in units
fixed costs + target net income / contribution margin per unit
how do you get breakeven in units
fixed costs / contribution margin per unit
how do you get break even in sales
fixed costs / contribution margin ratio
The break-even point in unit sales increases when variable expenses:
increase and the selling price remains unchanged.
Which of the following are considered to be product costs under variable costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses.
l
which of the following is an advantage of using participative budgeting
lower level managers are more likely to perceive budgets as fair
The amount by which a company's sales can decline before losses are incurred is called the:
margin of safety
is the salary paid to the store manager at its Chico store a common fixed expense?
no