Accounting Test 2

What are the benefits of budgeting ?

-forces management to plan for future - help communicate the companys goals and provide means for coordinating activities and efforts throughout the company

the range of R squared value is between

0 and 1

Mangers must considers:

1) How does unit variable manufacturing costs compare to the purchase price form the supplier? 2) If we outsource, could any fixed costs be avoided? 3) What can be done with the freed up capacity?

To determine if the decision should be accepted, the manager must consider three questions:

1) Is there sufficient excess capacity to fill this special order? - if not and they accept they give up regular sales 2) is the special unit CM positive? Is the total special CM greater than any additional fixed costs generate by accepting the special order? 3) Will accepting the special order affect regular sales in the long run?

In making regular price decisions managers must consider two questions:

1) What is the company's target profit? 2) How much control does the company have over pricing?

Calculated 2 ways:

1) by dividing total CM by sales revenue 2) by dividing unit CM by sales price

The CM income statement, tells managers two things that they cannot find on a traditional income statement:

1) the amount by which sales revenue exceeds variable costs 2) the amount available to cover fixed costs and provide operating income

We will use the unit approach to perform CVP analysis for a multi product company. To perform this analysis, we will use 5 steps:

1. Find the unit CM for each produced offered by the company 2. determine the sales mix 3. calculate the weighted average CM per unit 4. apply the unit formula using the weighted average CM per unit 5. Split the answer apart into separate products using the sales mix

Assumptions made during CVP calculations- if any of these do not hold, the calculations may be inaccurate and managers should exercise caution

1. Revenue is linear throughout the relevant range 2. Costs can be classified according to cost behavior and are linear throughout the relevant range 3. Inventory levels remain constant 4. Sales mix remains constant throughout the calculations

In making keep/ drop decisions mangers must consider four questions:

1. does the segment provide a positive contribution margin? 2. If the segment is discontinued, are there an fixed costs that can be avoided? 3. Will sales related to other products be affected if a particular segment is dropped? 4. What can be done with the freed up capacity?

Which of the following statements is true regarding the indifference point​ calculation? A. If sales volume is expected to be higher than the indifferent​ point, management should choose the cost structure with higher fixed costs. B. If sales volume is expected to be higher than the indifferent​ point, management should choose the cost structure with higher variable costs.

A

Which of the following statements regarding decision making​ "rules of​ thumb" is​ correct? A. Information considered relevant to a decision is information that differs between alternatives and pertains to the future. B. Qualitative considerations are ignored when evaluating decision alternatives. C. A traditional income statement approach should be used in decision making. D. Per unit variable costs can be misleading because such amounts appear to behave as fixed costs. E. Variable costs should only be considered in total.

A

Which of the following best defines the concept of a relevant​ cost?

A. A future cost that differs among alternatives.

Which of the following statements best describes the​ break-even point? A. The point at which sales revenue equals contribution margin. B. The point at which operating income is equal to​ $0. .C. The point at which variable costs equal fixed costs.

B

Which of the following statements is true with regard to​ short-term decision-making? A. Variable costs should be considered in total. B. Qualitative and quantitative information should be considered. C. Fixed costs should be considered on a per unit basis.

B

Which of the following is not an assumption made during CVP​ analysis? A. Revenue is linear throughout the relevant range. B. Sales mix remains constant. C. Inventory levels fluctuate. D. Costs can be classified according to cost behavior.

C

This amount tells mangers the excess of the sales price over the unit variable cost and the amount from every unit sale available to cover fixed costs and provide operating income

CM per unit

tells mangers the amount from each sales dollar the is available to cover fixed costs and provide operating income

CM ration/ percentage

Expresses the relationships among costs, sales volume, and profit

CVP (cost-volume-profit) analysis

Which of the following questions best describes a​ keep/drop decision? A. In what order should we fill ​demand? B. Should we accept a one​ time, large volume order at a reduced sales ​price? C. What should we charge for our ​product? D. Should we continue to operate the ​segment? E. Should we continue making the part in ​house?

D

Which of the following statements concerning cost estimation models is​ incorrect? A. Cost estimation models are not typically considered valid for activity levels that fall outside of the relevant range of operations. B. The managerial judgment method of determining cost behavior requires extensive knowledge of the​ company's operations. C. The equation derived using the high low method considers the lowest and highest values for the independent variable. D. Regression analysis is the least accurate method used to develop cost estimation models. .E. The scattergraph method is advantageous because decision makers are able to easily identify outliers.

D

Which of the following is considered when deciding whether to accept a special​ order? A. Is there sufficient excess​ capacity? B. Are fixed costs ​affected? C. Will regular sales be affected in the long ​run? D. Is the special unit contribution margin ​positive? E. All of the above are considered.

E

The only criteria necessary to make information relevant to the decision making process is that it differs between alternatives.

F

The unit contribution margin is calculated by subtracting the unit fixed cost from the sales price.

F

CVP analysis relies on our knowledge of cost function to express relationships among​ costs, sales​ volume, and profit.

F- behavior

Cost behavior relates to the categorization of costs as either product or period costs. True False

False

3 pieces of info we will use found in the output:

Intercept coefficient, X Variable 1 coefficient, R-squared value

"goodies of fit" measures

R-squared

A company having few competitors would typically use​ cost-plus pricing to determine its regular sales price.

T

The contribution margin income statement is organized by cost behavior.

T

When making an outsourcing​ decision, management must consider how the in house unit variable costs compare to the price that will be paid to the outside​ provider/supplier.

T

Sensitivity analysis helps management answer​ "What If?" questions.

True

he relevant range is defined as the range of activity over which a cost behavior formula is considered valid. True/ False

True

Advantages of account analysis

a person is involved... bring info about the mkt, customers, and suppliers "to the table" that isn't "known" by a computer

Requires managers to use their judgement to determine cost behavior and develop a cost behavior formula

account analyses

Outliers should be_______, but not included in the data set used to develop a cost behavior formula

analyzed

if a fixed cost will not be incurred if a segment is dropped, the cost is considered also known as

avoidable - direct or traceable fixed costs

advantages of high low method

based on 2 actual data points, objective ( formula developed based on rules)

To perform CVP analysis, management needs an income statement that is organized by

behavior, variable and fixed

In order to use cost for decision making purposes, managers need to understand the _________ categorizations of cost

behavioral

The sales volume at which all costs are completely covered and an operating income of $0 is achieved

break-even point

intentional over budgeting of expenses or underbudgekting of revenue

budgetary slack

are quantitative plans used by managers to plan for resource requirements to control operations

budgets

What is the problem with this

can lead to annual budget increases that are not necessary

prepared by determining the dollar amount and timing of capital investments

capital expenditure budget

answers question: What are the company's expected cash inflows for the period?

cash collections budget

answers question:What are the company's expected cash outflows for the period?

cash payments budget

It is possible that sales of the company's other products will change if a segment is dropped. If this occurs, the CM related to the other product will _______, however avoidable and common fixed costs will___

change; remain the same

a realistic _____ should be established for all sales on account. It is common practice to look back at historical collection records when establishing the collection pattern used in the budgeting process

collection pattern

answers the question: What is the company's expected cash balance at the end of the period? - mangers able to determine if the company is expected to operate with a cash surplus for a cash deficit

combined cash budget

target profit is calculated as a ________ - it represents the return expected by a company's shareholders

company's total assets

If a surplus is budgeted, management may

consider such actions as making additional capital expenditures or paying down long term debt

the __________ organizes cost according to cost behavior

contribution margin (CM) income statement

How costs/ respond to changes in activity level

cost behavior

Once a strong correlation is established between the costs and the cost driver and outliers have been identified and removed, managers use the scatterplot to develop a _______

cost behavior formula

result of purchases budget is

cost of purchases (not same as budged cash payments to suppliers)

to achieve a give target profit, management uses

cost plus pricing

the scatterplot method provides a visualization of the relationship between the ______ and _____ activity levels

costs (y) and cost driver (x)

Who determines a​ company's sales​ mix?

customers

If either thee sales pice increases, the variable cost per unit decreases, or the total fixed costs decrease, the break even point will___

decrease

As the activity level decreases, the total mixed costs _______ and per unit mine cost ________

decrease; increases

to determine the timing of collections, mangers must

determine the amount of expected cash sales and the amount of expected sales on account

Total variable costs are ____ proportional to changes in activity level

directly - as activity level decreases, so do the total variable costs, as activity level increases so do the total variable costs

for companies with low operating leverage, changes in sales volume ____ significantly affect operating income because the unit contribution margin is -___

do not; high

If R - squared is close to 1, then the cost driver used in the analysis

does fit the data and should be used to predict the costs

If R-squared is close to 0, the the cost driver used in the analyses

does not fit the date and should not be used to predict the costs

the difference between full capacity and the companys current operations

excess capacity

Which of the following cost behaviors does not change in​ total?

fixed

_______ costs contain both variable and fixed components

fixed

A lin is visually placed on the data points. Once the line is placed, the _______ and _______ are determined

fixed costs (y intercept) ; unit variable cost (slope)

what is the advantage of this

forces management to consider every dollar that is included in the budged

Used properly budgets can help align the goals of management with the goals of the company; this is known as

goal congruance

if a company has more fixed costs than variable costs, it is said to operate with

high operating leverage

Identifies the highest and lowest cost driver activity levels (independent variable, x) and pairs the activity levels with their related costs (dependent variable, y) - using these two data points, the unit variable cost and fixed costs are calculated and a cost behavior formula is created

high-low method

how can budgetary slack be minimized

implementing a formal budge review process and offering incentives to management for meeting challenging, yet achievable goals

Only managers who have ________ should be allowed to use account analyses

in depth knowledge of companies operations

based on the contribution margin income statement format: (sales price x number of units)- (unit VC x number of units) -FC= opy

income statement approach - to calculate break even or target profit, plug in the "knowns" and solve for the "unknowns"

Managers use one of the three methods to determine break-even and target profit

income statement approach, the unit approach, and the CM ratio approach

If the sales price decreases, the variable cost per unit increases or the total fixed costs increase, the break even point will_____

increase

How is in negative?

increase the complexity of the budgeting process and the likelihood of budgeting slack

As the activity level increases, the total mixed costs ______ and per unit mixed costs ________.

increases; decreases

managers use an _________ to make short term decisions - this approach analyzes variable costs and fixed costs separately using the contribution margin approach

incremental analysis

the point at which the two options yield the exact same operating income

indifference point

Unit fixed costs are ______ proportional to changes in activity level

indirectly - as the activity level increases, the unit fixed cost decreases, as the activity level decreases, unit fixed cost increases

How is it beneficial for companies?

info gathered is more accurate and the involvement of multiple levels of management results in increased motivation

represents the fixed costs (y-intercept)

intercept coefficient

advantages of this method

keeps management focused on their operational and strategic goals

Options to do with freed up space:

letting resources sit idle, renting out an freed up space, expanding existing production, and adding a new segment

This cost structure is not as risky for companies. They do not stand to ______ a lot in bad economic times; however, they do not have a lot to _____ in good economic times

lose; gain

If a company has less fixed costs than variable costs, it is said to operate with

low operating leverage

consist of operating budgets and financial budgets

master budget - planning tools for merchandisers

prepared by

multiplying the expected unit sales by the expected unit sales price = budget sales revenue (not same as budget cash receipts from customers)

This shortcut approach is derived using the contribution margin income statement but isolates number of units:

number of units= (FC + copy) / (SP-unit VC) - to calculate break even or target profit, plug in the "knowns" and solver for the "unknowns"

the high low method is more ________ than the first tow methods but since it only uses two data points, it is not as ______ as the last method we discussed

objective; accurate

highly dependent on cost behavior. developed by creating a cost behavior formula (y=mx+b) and inserting the expected units to be sold in the formula for the independent variable (x) (not all cash expenses)

operating expenses Budget

an abnormal data point

outlier

Managers should verify that the high and low data points are not _______ before using them to create the cost behavior formula

outliers

the scatterplot helps managers easily identify

outliers

disadvantages of regression analysis

output is hard to read, possible that an outlier could be part of the data set (why it is important to look at R-squared)

This decision is all about costs

outscoring decisions

slack is built into budgets to :

overcome inevitable budget cuts, to account for uncertainty win the market, and to improve the appearance of operational results

majority of businesses now use a ________ this approach relies on the knowledge of multiple levels of management within the company

participative approach budgeting

Variable costs do not change on a ______

per unit basis

disadvantages of high low method

possible that one of the 2 data points used could be an outlier (why it would be important to graph the data points first before running the high low method)

If a company has fe competitors and is recognized brand name, it has control over the price charged to its regular customers it is said to be

price setter

If a company is in a highly competitive market and is not recognized brand name, it does not control the price charge to its regular customers, it is said to be a

price taker

Advantage of scatter plot

provides a picture (this shows if there is linear relationship between x and y AND shows if a potential outlier)

A contribution margin income statement

provides behavioral information about the​ company's operating results.

If a deficit is budgeted, management may

pull money form a line of credit or delaying a planned capital expenditure

prepared by subtracting the expected costs in beginning inventory from the costs of units needed during a given period of time ( expected cost of sales plus desired costs in ending inventory)

purchases budget

When performing incremental analysis for special orders, mangers must consider:

reduced sales price, any change in the unit variable cost, and any change in the fixed costs

a statistical procedure used to determine the cost behavior formula - the most accurate and objective method available to predict cost behavior

regression analysis

When making decisions mangers should focus on ________ - this is info that pertains to the future and differs between the available alternatives

relevant information

In addition to considering relevant quantitative information, mangers should also consider _________

relevant qualitative information - questions such as "How will this decision affect employee morale?" and "How will this decision affect the company's relationship with existing customers?"

Managers can predicts costs accurately only if they use cost info from the appropriate

relevant range

Range over which formal is valid

relevant range

the range over which the identified cost behaviors are valid.

relevant range

Companies often begin the annual budgeting process by:

reviewing the results of their prior operating period and making the necessary adjustments to achieve future goals

Instead of budgeting for 12 months at a time, the company is in perpetual budgeting mode. At all times, the company has 12 months worth of budgets available

rolling budget approach

starting point in the budgeting process for all companies

sales budget

the relative proportion of products sold by a company and is determined by the market-- companies that sell more than one product have to consider this when performing CVP analysis

sales mix

This shortcut approach is also derived using the contribution margin income statement but isolates sales revenue instead of units:

sales revenue= (FC + copy)/ CM%

Once an indifference point is calculated, mangers can decide which option to pursue depending upon the company's expected

sales volume

for companies with high operating leverage, changes in _________ significantly affect operating income because the _______ is high

sales volume; unit contribution margin

graphical representation of all data points for a given cost

scatterplot

CVP analysis helps to address "what if" questions, such as "what if we change the sales price?", what if the change variable costs?" and "what if we change fixed cost?" this is referred to as

sensitivity analysis

when the company receives a one time, large volume order from a customer at a reduced sales prime

special order decisions

regression is simple to complete using available __________

spreadsheet technology

If the data points fall in a pattern that closely resembles a line, there is a ________ correlation between the costs and cost driver

strong

This method to determine cost behavior is the most ________ of the four methods

subjective

Disadvantages of account analysis

subjective (since equation based on judgment) not just anyone should use ( should be someone with an interactive working knowledge of company)

disadvantages of scatter plot

subjective (since placement of the line of best fit could vary)

This method is _____ due to the visual placement of the line on the data points

subjunctive

To achieve a given target profit, management uses

target costing

The sales volume at which al costs are completely covered an operating income greater than $0 is achieved

target profit point

The total contribution margin tells managers

the amount by which sales revenue exceeds variable cost

Which of the following would occur if a company experienced a decrease in unit variable​ costs?

the contribution margin will increase

if the sales volume is expected to be higher than the indifference point,

the manger should choose the option with high operating leverage

if the sales volume is expected to be lower than the indifference point,

the manger should choose the option with low operating leverage

Managers use the CM ratio to predict

the sales revenues need to achieve a given operating income

The unit CM is also used to predict

the unit sales needed to achieve a given operating income

If an segment, or part, of a company is not as profitable as desired, mangers must decide whether

to continue operating the segment

Fixed costs do not change in ______

total

Once all fixed costs are covered, additional unit sales will increase operating income by an amount equal to the ________

unit cm

advantages of regression analysis

uses all data points, objective, statistical measure (R-squared) tells us if a linear relationship exists between x and y and if potential outlier exists

difference between the budgeted figure and the actual result

variance

If the data points fall in a pattern that does not costly resemble a line, there is a ______ correlation between the costs and the cost driver

weak

How should we approach decisions that pertain to a short period of time?

with the knowledge that all current decisions ultimately affect the company's long term operations and market position

represents the unit variable cost (slope)

x variable 1 coefficient

Is this cost structure risky for companies?

yes because they have a lot to lose in bad economic times; however, they have a lot to gain in good economic times

should management consider more than just monetary incentives

yes- recognition and additional vacation time

begin the annual budgeting process with a "clean slate"

zero based budgeting