Acct 201 Chapter 1,6,11 SB
After reaching the break-even point, a company's net operating income will increase by the ..... ...... , Correct Unavailable per unit for each additional unit sold.
Contribution margin
A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is ______.
Contribution margin = 20,000 × ($20 - $11) = $180,000.
CVP is the acronym for
Cost Volume Profit
Which of the following should not be included in the analysis when making a decision?
Non-differential future costs Sunk costs
True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information. True false question.
TRUE
True or false: The finished product of one company can become raw materials for another company.
TRUE
Within the relevant range, which type of cost changes in total, in direct proportion to changes in activity level?
Variable
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______.
income statement
Synonyms for differential costs include ______ cost.
incremental avoidable
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.
incremental avoidable
Isolating relevant costs is desirable because ______.
all information needed for the total cost approach is rarely available critical information may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis
The contribution margin equals sales minus ______.
all variable costs
Discretionary fixed costs include ______.
management training programs advertising
Factory materials, such as cleaning supplies, that are not components of finished products are classified as ______.
manufactoring overhead
Direct materials and direct labor are both ______ costs.
manufacturing
A cost that can be eliminated by choosing one alternative over another is a(n) ___ cost
avoidable or relevant
Contribution margin ratio is equal to....
contribution margin divided by (sales) net sales revenue
When a constraint exists, companies need to focus on maximizing ______.
contribution margin per unit of constraint
CVP analysis allows companies to easily identify the change in profit due to changes in ______.
costs volume selling price
Prime costs include ______.
direct materials direct labor
The term "cost structure" refers to the relative proportion of... and ... cost in an organization
fixed and variable
Space being used that would otherwise be idle has a(n) ___ cost
opportunity
The potential benefit given up when selecting one alternative over another is a(n) ______ cost.
opportunity
Inventorial costs is another term for ___ cost
product
When demand for products exceeds the production capacity, a(n)
volume trade off
Potential advantages of dropping a product line or other segment include ______.
an overall increase in net operating income avoiding more fixed costs than the company loses in contribution margin
Fixed costs that cannot easily be changed and often lock a company into a multi-year decision are called ___ fixed cost
committed
A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?
company B
If some products must be cut back because of a constraint, produce the products with the highest ______.
contribution margin per unit of constrained resource
The degree of operating leverage = ______.
contribution margin ÷ net operating income
Any item for which cost data is desired is called a(n) ___ ___
cost, object
True or false: Depreciation of existing assets is relevant to decisions.
false
True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.
false
A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin. Multiple choice question.
fixed
Total contribution margin equals ______.
fixed expenses plus net operating income
Contribution margin is first used to cover ....... expenses. Once the break-even point has been reached, contribution margin becomes...
fixed, profit
Irrelevant costs include ______.
future costs that do not differ between alternatives sunk costs
If operating leverage is high, a small percentage increase in sales produces a .... percentage increase in net operating income than if operating leverage is low.
higher
To maximize total contribution margin when a constrained resource exists, produce the products with the ______.
highest contribution margin per unit of the constrained resource
A fixed cost remains fixed ______ within the relevant range of activity.
in total
Variable costs vary ______ within the relevant range of activity.
in total
When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost.
irrelevant
In order to prevent confusion and keep attention focused on critical information, it is desirable to ______.
isolate relevant costs from irrelevant costs
A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating
leverage
Factory burden is a synonym for ___ ____
manufacturing overhead
Indirect materials and indirect labor are classified as ______.
manufacturing overhead
The accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized is known as the ___ principle.
matching
The components of prime costs are direct. ___ costs and direct ___ costs.
materials labor
Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.
net operating income
Cost objects include ______.
organizational subunits anything for which cost data is desired customers
When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored. Multiple choice question.
original cost of the car
Direct materials, direct labor, and manufacturing overhead are all ______ costs.
product
Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is .... for Adams, Inc. and ..... for Baron, Inc.
three, two
Being less dependent on suppliers and making profits on both parts and the final product are advantages of
vertical integration
Less dependence on suppliers is an advantage of ______. Multiple choice question.
vertical integration
A special order should be accepted ______.
when the incremental revenue from the special order exceeds the incremental costs of the order
Within the relevant range of activity ______.
costs and activity can be approximated by a straight line fixed costs remain constant in total
An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as ______.
the degree of operating leverage
When making a decision, only relevant items are included in the analysis of the alternatives when using ______. Multiple choice question.
the differential cost approach only
When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.
zero
Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was ______.
Contribution margin ratio = $100,170 ÷$189,000 = 53%.
Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.
Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000
Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______.
New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.
The following information is for S&P Enterprises for the month of July:Total fixed cost for the month of July was ______. Direct materials $76,000 Direct labor $40,000 Variable manufacturing overhead $25,000 Fixed manufacturing overhead $30,000 Variable selling expense $12,000 Fixed selling expense $15,000 Variable administrative expense $6,000 Fixed administrative expense $18,000
$30,000 + $15,000 + $18,000 = $63,000
A company purchased a 12 month insurance policy on October 1 for $1,200. On the December 31 annual financial statements, ______.
$300 is reported as a expense and $900 is reported as an asset
A company with a high ratio of fixed costs ______.
-more likely to experience a loss when sales are down than a company with mostly variable costs -more likely to experience greater profits when sales are up than a company with mostly variable costs.
Product DGH has a monthly demand of 7,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 5,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 2,000 direct labor hours available, the company should produce ,__units of Product DGH and .Blank 2Blank 2 .__ units of Product RBG
1,500 and 5,000
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $ ___ per min.
3
Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is ______.
34%
when the incremental revenue from the special order exceeds the incremental costs of the order
A special order should be accepted ______.
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for Product ______.`
ABC Reason: The company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC's is $2 per minute of machine time (CM of $10 ÷ 5 minutes) while XYZ's is only $1.50 per minute of machine time (CM of $15 ÷ 10 minutes).
Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?
Adams has a higher degree of operating leverage than Baron. Baron's net income grows twice as fast as its sales.
Which of the following are most likely fixed costs?
Administrative salaries Factory rent Factory insurance
Which of the following can make a product line look less profitable than it really is?
Allocated common fixed costs
A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is ______.
Break-even point = $305,000 ÷ $40 = 7,625.
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
True or false: All of a company's depreciation, property taxes and insurance premiums are considered manufacturing overhead.
FALSE
True or false: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.
FALSE
True or false: Cost structure refers to the relative portion of product and period costs in an organization. True false question.
FALSE
True or false: Labor costs that can be specifically traced to a product are indirect labor costs.
FALSE
True or false: Some decisions only have one alternative.
FALSE
True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.
FALSE
Which of the following may be an advantage of making a part rather than buying it?
Less dependence on outside suppliers A smoother flow of parts and materials for production
A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be ______.
Net operating income = (26,000 - 17,000) × $22 = $198,000.
Which of the following statements are true? (Period Cost)
Period costs do not flow through the inventory accounts. Period costs are expensed when incurred.
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______.
Reason: The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make X 20,000 units).
CHAPTER 6
SB
Which of the following statements is correct?
The higher the margin of safety, the lower the risk of incurring a loss.
Contribution margin ______.
becomes profit after fixed expenses are covered
How individual costs react to changes in activity level is referred to as cost ___
behavior
The machine or process that is limiting overall output is a(n) ______.
bottleneck
The materials that go into the final product are called ___ materials
raw
Costs and benefits that always differ between alternatives are ______ costs and benefits.
relevant
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______.
the profit from the best alternative use of the resource -Opportunity cost is zero when there is no alternative use of the resource.
When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.
the total cost approach only
When considering accepting a special order, ______.
there must be idle capacity normal sales must not be affected
Which of the following are assumptions of cost-volume-profit analysis?
Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant.
True or false: Variable costs remain fixed in total within the relevant range of activity.
FALSE
True or false: Without knowing the future, it is best to have a cost structure with high variable costs.
FALSE
Which of the following items are found above the contribution margin on a contribution margin format income statement?
Variable expenses Sales
A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.
cm ratio × change in sales - change in fixed expenses
When a company sells one unit above the number required to break-even, the company's net operating income will ______.
change from zero to a net operating profit
When making a decision using incremental analysis consider the ______.
change in cost resulting specifically from the decision change in sales dollars resulting specifically from the decision
Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.
decrease
Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n).... ....
decrease $3,000
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
The first step in decision making is to ______.
define the alternatives
The measure of how a percentage change in sales affects profits at any given level of sales is the ______.
degree of operating leverage
A future cost that is not the same between any two alternatives is known as a(n) ______, incremental, or avoidable cost.
differential
Focusing on future costs and benefits that are not the same between alternatives is ______.
differential analysis
The key to effective decision making is ______.
differential analysis
When considering decision alternatives, only relevant costs are included when using the
differential cost
An increase in cost between two alternatives is a(n)
incremental or differential
A manufacturing cost that cannot be easily traced to a specific cost object is a(n) ___ cost
indirect
Salaries of factory supervisors and factory maintenance personnel are examples of ______ labor costs.
indirect
Minor items such as nails and glue are usually considered to be ______.
indirect materials
Manufacturing overhead costs include ______.
indirect materials, factory supervisors' salaries, and factory depreciation
Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.
irrelevant
When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.
irrelevant
Differential revenue is an example of a(n) ______ benefit.
relevant
When making a decision only ______ costs and benefits should to be included in the analysis.
relevant
The assumption that cost behavior is strictly linear is reasonably valid within the ___ ____ of activity .
relevant range
Differential revenue is an example of a(n) ______ benefit. Multiple choice question.
relevent
Within the relevant range of activity, variable costs ______.
remain constant per unit vary in total
The variable expense ratio is the ratio of variable expense to ______.
sales
Selling costs include ______.
sales salaries, sales commissions, and advertising
When preparing a CVP graph, the horizontal axis represents ______.
sales volume
To simplify CVP calculations, it is assumed that ______ will remain constant.
selling price
CVP analysis focuses on how profits are affected by ______.
selling price sales volume total fixed costs mix of products sold unit variable cost
A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n)
special order decision
Costs that have already been incurred and can not be changed by decisions made in the current period or in future periods are called ___ cost
sunk
What type of cost is never relevant and should be disregarded when making decisions?
sunk
When considering decision alternatives, both relevant and irrelevant costs are included when using --- ---- the approach.
total cost
At the break-even point ______.
total revenue equals total cost net operating income is zero
Direct labor is also called __ ___
touch labor
Activities ranging from development to production to after-sales service are called a(n)
value chain
Within the relevant range, ___ cost remain constant on a per unit basis.
variable
A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is ______.
($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.
Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?
Adams has a higher degree of operating leverage than Baron. Baron's net income grows twice as fast as its sales. ($60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron.) (Operating level of $44,000 ÷ 22,000 = 2 for Baron indicates that the company's net operating income grows twice as fast as sales.)
Which of the following statements are true?
Sales commissions are period costs. Period costs are expensed in the same period in which they are incurred.
A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.
alternative uses for the equipment salvage value
Average costs ______.
are often misleading contain sunk costs
A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.
avoidable
A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.
constraint
Anything that prevents you from getting more of what you want is a(n)
constraint
Administrative costs include ______.
executive compensation and public relations costs
True or false: Some decisions only have one alternative. True false question.
false
True or false: When estimating the cost of taking a 300 mile trip, the average cost per mile × 300 is the best way to evaluate the total cost.
false
As the level of activity moves outside of the relevant range, ___ costs increase or decrease in discrete steps rather than a linear fashion.
fixed
One of the great dangers in allocating common __________ costs is that such allocations can make a product line look less profitable than it really is.
fixed
When making a volume-trade off decision, managers should ignore ______.
fixed costs
Manufacturing costs include ______.
manufacturing overhead direct labor direct materials
A dress manufacturer would consider the cost of relatively inexpensive items like thread to be part of ______.
manufacturing overhead indirect materials
The amount by which sales can drop before losses are incurred is the....
margin safely
A company must make a volume trade-off decision when they ______.
must trade off units of one product for units of another due to limited production capacity do not have enough capacity to satisfy the demand for all of its products
A laptop computer manufacturer would consider the computer's processor chip to be a(n) ______ cost.
direct material
Manufacturing costs can be divided into three categories: ____ ____ , ______, _______ _____
direct materials direct labor manufactoring overhead
A cost that can be easily and conveniently traced to a specific cost object is a(n) ____ cost of that cost object, whereas costs that cannot be easily and conveniently traced to that specific cost object are ___ costs.
direct, common
Fixed costs that can be cut-back or eliminated without significant damage to a company's long-term goals are ___ fixed cost and ___ fixed costs can not be easily changed or eliminated.
discretionary or managed committed
When constructing a CVP graph, the vertical axis represents ______.
dollars
Other names for manufacturing overhead include ______.
factory burden factory overhead indirect manufacturing costs
Indirect labor costs include ______.
factory security guard wages, assembly-line supervisor salary
Within the relevant range of activity, ______ costs remain constant in total.
fixed
As the level of activity moves outside of the relevant range, fixed costs, ______.
increase or decrease in discrete steps
When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using.... analysis
incremental
A cost that contains both variable and fixed cost elements is a(n) ______ cost.
mixed
Committed fixed costs include ______.
real estate taxes, top management salaries
Cost behavior ______.
refers to how a cost will change as activity level changes categorizes costs as fixed, mixed and variable
Period costs are always expensed on the income statement in the period in which ______.
they are incurred
Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.
total contribution margin will increase by $0.70 net operating income will increase by $0.70
Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.
$380,000
A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $....
$5,000
JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN?
$98,000 ÷ ($50 - $15) = 2,800
Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivian's Violins net operating income is ______.
$99,000= $85,000-$184,000
Costs that can be easily and conveniently traced to a specific product are called ______ costs.
direct
Fantastic Furniture makes custom order couches. The material used to make a couch is a(n) ______ cost of the customer placing the order.
direct
Materials that become an important component of the finished product whose cost can be easily and conveniently traced to the finished product are ___ materials
direct
In an automobile manufacturing plant, the assembly-line workers are classified as ____ ____ cost.
direct labor
