Managerial Accounting Ch 5 & 6 Quiz

common fixed cost

a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment The salary of CEO of General Motors is a common fixed cost of the various divisions of General Motors The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the store's various departments --groceries, produce, bakery, meat, and so forth. The cost of the receptionist's salary at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office but not to individual doctors.

operating leverage

a measure of how sensitive net operating income is to a given percentage change in unit sales/ sales dollars/ volume sales. degree of operating leverage = contribution margin / net operating income percentage change in net operating income = degree of operating leverage * percentage change in sales

Common mistakes made by companies when assigning costs to segments include

a. arbitrarily allocating common fixed costs b. inappropriately assigning traceable fixed costs d. omitting costs that should be included

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

absorption

Variable costing income statements are based upon a Blank______ format.

contribution

A shift in the sales mix from high-margin items to low-margin items can cause total profit to

decrease

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

fixed MFG OH

absorption costing income

is influenced by changes in unit sales and units of production. Net operating income can be increased simply by producing more units even if those units are not sold.

break-even analysis

dollar sales for company to break even = (traceable fixed expenses + common fixed expenses) / Overall CM Ratio dollar sales for a segment to break even = segment traceable fixed expenses / Segment CM Ratio

Product costs under absorption costing include

fixed MFG OH direct materials direct labor variable MFG OH

Total contribution margin equals

fixed expenses plus net operating income

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

fixed overhead is accounted for

CVP Graph

graph that shows the relationship among unit sales volume, total revenue, total cost, and profit. horizontal axis: unit volume Vertical axis: dollars

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

increase Reason: When fixed costs are put on a per unit basis, it appears that the total cost will increase as the number of units increase.

Arbot Co. manufactures appliances at three manufacturing facilities in the United States. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a Blank______ for the individual product lines made in the plant.

traceable fixed cost for both the plant and a common fixed cost

When a segment is eliminated, a

traceable fixed cost will disappear common fixed cost will remain unchanged

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

absorption costing (full cost method)

treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. cost of a unit of product = direct materials, direct labor, and BOTH variable and fixed MFG OH.

Absorption costing is

used by most companies for both internal and external reports required by GAAP and IFRS

Direct costing or marginal costing are other terms for __________ costing.

variable

Segment contribution margin equals segment revenue minus _________ the expenses for the segment.

variable

The contribution margin equals sales minus all ______ expenses.

variable

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

variable

Which of the following costing approaches is best suited for cost-volume-profit analysis?

variable

Absorption costing income statements ignore

variable and fixed cost distinctions

Variable expense Ratio

variable expense ratio = variable expense per unit / unit selling price or = variables expenses / sales

CVP analysis allows companies to easily identify the change in profit due to changes in ______.

volume product mix selling price

When calculating the profit impact of discontinuing a segment, consider Blank

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

advantages of variable costing, together with Contribution Approach

1. enables CVP analysis 2. easier to explain changes in net income 3. supports decision-making

Incorrectly or arbitrarily assigning common costs to segments:

1. holds managers responsible for costs they can't control 2. could reduce the overall profits of the company 3. distorts the profitability of segments

MDF OH Deferred in (released from) inventory

= fixed MFG OH in ending inventories - fixed MFG OH in beginning inventories

CVP

Cost Volume Profit

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False. Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

Which 5 factors affect profits?

Selling Price Sales volume Unit variable costs Total fixed costs Mix of products sold

A company with a high ratio of fixed costs:

is more likely to experience a loss when sales are down than a company with mostly variable costs is more likely to experience greater profits when sales are up than a company with mostly variable costs.

Break even point

the level of sales at which profit is zero. on CVP graph, BE point is where the total revenue and total expense lines cross. Dollar sales to break even = Fixed expenses/CM Ratio break-even point is the level of sales at which total revenue equals total costs. break-even point is reached when contribution margin is equal to total fixed expenses Break-even point occurs on the Cost-Volume-profit graph where total contribution margin equals total fixed expenses.

Discontinuing a profitable segment results in

the loss of the segment's revenues a reduction in the overall profits of the company

cost structure

the relative proportion of fixed and variable costs in an organization

A reason why absorption costing income statements are sometimes difficult to interpret is that:

they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.

The difference in net operating income between absorption costing and variable costing is due to the Blank______

time when fixed overhead is expenses

Segment break-even calculations include Blank______ fixed expenses

traceable

Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax of a store is the_____________ fixed cost of the store and the _______________ fixed cost of each product line sold in the store.

traceable common

Using absorption costing for segmented income statements can lead to

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

traceable fixed cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated. only those costs that would disappear over time if segment itself disappeared. ie if a division were sold or discontinued it would no longer be necesary to pay that division manager's salary. Salary of Fritos product manager at PepsiCo is traceable cost of the Fritos business segment of PepsiCo. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing The liability insurance at Disney World is a traceable fixed cost of he Disney World business segment of The Walt Disney Corporation

Cost Volume Profit Graph (AKA break even chart)

A graph showing the relationship between costs, volume, and profits. A CVP graph highlights the CVP relationships over wide ranges of activity. Simpler form is Profit graph.

For external reporting, income statements are generally prepared using __________costing, while ________________costing is used for internal decision making purposes.

Absorption Variable

Contribution Margin

Amount remaining from sales revenue after variable expenses have been deducted. becomes profit after fixed expenses are covered. Contribution Margin = Sales Revenue - Variable Expenses Unit CM = selling price per unit - variable expenses per unit =P-V

CM Ratio Contribution Margin Ratio

CM Ratio = Contribution margin/sales CM Ratio = sales - variable expenses / sales CM Ratio = 1 - Variable expense ratio CM as a percentage of sales is referred to as CM Ratio. example, CM ratio of 40% means that for each dollar increase in sales, total contribution margin will increase by 40 cents. *Assuming fixed costs not affected.

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.

Using variable costing and the contribution approach for internal decision making Blank_____

Facilitates explaining changes in net income. Enables CVP analysis. Supports decision making.

Cost structure refers to the relative portion of product and period costs in an organization. T or F?

False.

Profit

Formula Profit = (Sales - Variable expenses) - fixed expenses =(P*Q - V Q) - fixed expenses =(P-V) * Q - Fixed expenses =Unit CM * Q - Fixed expenses Profit = CM ratio * Sales - fixed expenses Change in profit = CM ratio*change in sales - change in fixed expenses

Sales

Formula Sales = Selling price per unit * Quantity sold = P * Q note: Variable expenses = variable expenses per unit * Quantity sold = V * Q

If units produced < units sold

Inventory levels decrease and absorption costing net operating income < variable costing net operating income net operating income is lower under absorption costing because fixed MFG OH cost is released in inventory under absorption costing as inventories decrease.

If units produced > units sold

Inventory levels increase and absorption costing net operating income > variable costing net operating income net operating income is higher under absorption costing because fixed MFG OH cost is deferred in inventory under absorption costing as inventories increase.

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

T

sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales. break even point is more complex when more than one product are sold.

segmented income statement

Useful for analyzing the profitability of segments, making decisions, and measuring the performance of segment managers. variable expenses are deducted from sales to yield the contribution margin for the segment. the contribution margin tells us what happens to profits as sales volume changes -- holding a segment's capacity and fixed costs constant. CM is useful in decisions involving temporary uses of capacity such as special audits.

when would absorption costing and variable costing net operating income be the same?

no change in inventory units produced = units sold\ when production = sales, all of the fixed MFG OH incurred in the current period flows through to the income statement under both methods.

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will:

not change

Segmented income statements - common mistakes

omission of costs inappropriately assign traceable fixed costs (failure to trace costs directly or inappropriate allocation base) arbitrarily allocate common fixed costs

variable costing income

only affected by changes in unit sales. it is not affected by the number of units produced. as a general rule, when sales go up, net operating income goes up, and vice versa.

variable costing

only those manufacturing costs that vary with output are treated as product costs. accounts for fixed mfg oh costs differently than absorption. includes = direct materials, direct labor, and variable portion of mfg OH. Fixed MFG OH is not treated as a product cost under this method. It is treated as period cost.

Variable costing treats fixed manufacturing overhead as a(n) ___ cost

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

Absorption costing treats fixed manufacturing overhead as a Blank______ cost.

product

Assigning common fixed costs to segments impacts

segment margin only

Which of the following statements about the segment margin is not true?

The segment margin is obtained by deducting the common fixed costs that have been allocated to a segment from that segment's contribution margin.

Which of the following is a common mistake made by companies when assigning costs to segments?

They assign the costs of the corporate headquarters buildings to segments because the segments must cover those costs.

can traceable fixed cost become common fixed costs?

Yes fixed costs that are traceable to one segment may be a common cost of another segment. ie: flights. landing fees.

When a company produces and sells multiple products, which of the following are true?

a change in the sales mix will most likely change the break even point. each product most likely has a unique contribution margin each product most likely has different costs

Because nonmanufacturing costs are not included as costs of a product, the use of ________________ costing can lead to the omission of segment costs

absorption

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

absorption Reason: CVP analysis requires that costs be broken down into fixed and variable components.

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

absorption variable

The two general costing approaches used by manufacturing companies to prepare income statements are _______ costing and __________ costing.

absorption variable

margin of safety

is the excess of budgeted or actual sales dollars over the break-even sales dollars. It is the amount at which sales can drop before losses are incurred. margin of safety in dollars = total budgeted (or actual) sales - break even sales margin of safety percentage = margin of safety in dollars / total budgeted (or actual) sales in dollars the higher the margin of safety, the lower the risk of incurring a loss.

When the number of units produced is greater than the number of units sold, variable costing net operating income will be

less than absorption costing net operating income

If sales volume increases and all other factors remain constant, then the:

margin of safety will increase

Segmented income statements

may be prepared for activities at many levels in a company

GAAP and IFRS rules for publicly traded companies

require segmented financial data be included in annual reports require that the same method be used for both internal and external segment reporting create problem in reconciling internal and external reports

Target profit analysis

estimate level of sales needed to achieve a desired target profit unit sales to attain the target profit = (target profit + fixed expenses) / Unit CM dollar sales to attain the target profit = (target profit + fixed expenses) / CM ratio

Fixed manufacturing overhead costs are included as part of Work in Process inventory under Blank______

absorption costing only

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

be equal only when production and sales are equal.

One mistake companies make when preparing segmented income statements is arbitrarily assigning _______ fixed costs to segments.

common

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

When inventory increases, absorption costing net operating income is higher than variable costing net income due to the fixed manufacturing overhead Blank

deferred in the inventory account on the balance sheet

segment margin

segment Contribution Margin - Traceable fixed costs best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment. Note common fixed costs are not allocated to segments. most useful in major decisions that affect capacity such as dropping a segment.

Assumptions to simplify CVP calculations

selling price is constant costs are linear multiproduct companies, the mix of products remains constant in MFG, inventories do not change (units produced = units sold)

The impact on net operating income of a small change in sales for a segment is best predicted by using:

the contribution margin ratio.