ACCT Exam #3 (Chapter 6,7,8 Notes + Quizzes)
The formula for target sales is:
(Total fixed costs + Target profit)/ contribution margin ratio
The formula for target units is
(Total fixed costs + Target profit)/ unit contribution margin
Profit Equation
(Unit Price x Q)-(Unit Variable Costs x Q)- Total Fixed costs= Profit
Lea Company produces hand tools. Budgeted sales for March are 10,000 units. Beginning finished goods inventory in March is budgeted to be 1,300 units, and ending finished goods inventory is budgeted to be 1,400 units. How many units will be produced in March? 9,900 10,000 10,100 12,700
-10,100 Budgeted sales plus ending finished goods inventory, less budgeted beginning finished goods inventory equals budgeted production. (10,000 + 1,400 - 1,300 = 10,100)
Jillian Inc. produces leather handbags. The production budget for the next four months is: July 5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 1.3 hours of unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How many total labor hours will be budgeted for September? 7,500 9,750 16,500 26,250
-26,250 -Production units multiplied by total labor hours per unit: (7,500 × 1.3) + (7,500 × 2.2) = 26,250 or (7,500 × (1.3 + 2.2)) = 26,250
Pacific has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units, September 7,500 units. Pacific's policy is to have an ending inventory of 40% of the next month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are budgeted as follows: Fixed manufacturing costs $17,000 Fixed selling costs $10,000 Fixed administrative costs $8,300 Variable manufacturing costs $5 per unit produced Variable selling costs $3 per unit sold What is budgeted manufacturing overhead cost for August? $50,000 $47,000 $33,000 $32,000
-50,000 -Production = 6,000 + (40% × 7,500) - (40% × 6,000) = 6,600. Budgeted manufacturing overhead = (6,600 × $5) + $17,000 = $50,000. Selling and administrative costs are period costs and are not part of the budgeted manufacturing overhead.
Lemon, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000 units, budgeted sales is 1,200 units, and raw materials inventory and unit costs will stay constant. Direct materials $8,000 Direct labor $14,400 Manufacturing overhead $20,000 Selling and administrative expense $16,000 What is budgeted cost of goods sold for March? $40,734 $42,400 $48,880 $50,880
-50,880 -($8,000 + $14,400 + $20,000)/1,000 = $42.40 per unit; $42.40 × 1,200 = $50,880
Dane Inc. has forecast purchases on account to be $465,000 in March, 555,000 in April, $630,000 in May, and $735,000 in June. Seventy percent of purchases are paid for in the month of purchase, the remaining 30% are paid in the following month. What are budgeted cash payments for April? $528,000 $577,500 $388,500 $189,000
-528,000 ($555,000 × 70%) + ($465,000 × 30%) = $528,000
Clare purchases a single product for $15 and sells it for $30. Forecasted sales for the next three months are July 4,000 units, August 6,000 units, September 7,500 units. Clare's policy is to have an ending inventory of 40% of the next month's sales needs on hand. July 1 inventory is projected to be 1,500 units. What are budgeted purchases in units for August? 6,600 units 10,400 units 5,400 units 600 units
-6,600 -(6,000 × 60%) + (7,500 × 40%) = 6,600 units
Which of the following is not a component of the operating budget?
-Budgeted balance sheet
The number of units included in the production budget:
-may differ from the number of units in the sales budget, depending on ending inventory goals.
Break even point is
-the point at which the total revenue and total cost line cross (leaving zero profit) -used to determine the level of sales needed to break even, or earn zero profit
CVP's assumptions
1. Linear cost and revenue functions 2. All costs can be classified as either fixed or variable 3. Only volume affects total cost and total revenue 4. Production volume is equal to sales volume 5. Constant product mix
Meadow Company produces hand tools. A sales budget for the next four months is as follows: March 10,000 units, April 13,000, May 16,000 and June 21,000. Meadow Company's ending finished goods inventory policy is 10% of the following month's sales. March 1 beginning inventory is projected to be 1,400 units. How many units will be produced in March? 10,000 9,900 13,000 10,100
10,100 Budgeted sales plus budgeted ending inventory, less budgeted beginning inventory equals budgeted production. (10,000 + 10% × 13,000 - 1,400 = 9,900)
Jackson Inc. produces leather handbags. The production budget for the next four months is: July 5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 0.5 square meters of leather. Jackson Inc.'s leather inventory policy is 30% of next month's production needs. On July 1 leather inventory was expected to be 1,000 square meters. What will leather purchases be in July? 2,300 square meters 2,550 square meters 2,700 square meters 3,575 square meters
2,550 -(5,000 × 0.5) + (7,000 × 0.5 × 30%) - 1,000 = 2,550
Crystal, Inc. has prepared the following budgets for March. In March, budgeted production is 1,000 units, budgeted sales is 1,200 units, and raw materials inventory will stay constant. Direct materials $4.00 per unit Direct labor $7.20 per unit Manufacturing overhead $10.00 per unit Selling and administrative expense $8.00 per unit $20,367 $21,200 $25,440 $35,040
25,440 ($4.00 + $7.20 + $10.00) × 1,200 = $25,440. The cost of goods sold budget is based on the number of units sold; not on the number of units produced.
Dayton has forecast sales to be $205,000 in February, $270,000 in March, $290,000 in April, and $310,000 in May. The average cost of goods sold is 60% of sales. All sales are made on credit and sales are collected 50% in the month of sale, 30% the month following and the remainder two months after the sale. What are budgeted cash receipts in May? $267,000 $296,000 $161,250 $241,500
296,000 ($310,000 × 50%) + ($290,000 × 30%) + ($270,000 × 20%) = $296,000
Jillian Inc. produces leather handbags. The production budget for the next four months is: July 5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 1.3 hours of unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). What will be the total labor cost for the month of August? $303,800 $231,000 $121,500 $161,000
303,800 -Production units, multiplied by direct labor hours, multiplied by the hourly rate for unskilled and skilled labor, respectively: (7,000 × 1.3 × $8) + (7,000 × 2.2 × $15) = $303,800
Skybird has forecast sales for the next three months as follows: July 4,000 units, August 6,000 units, September 7,500 units. Skybird's policy is to have an ending inventory of 40% of the next month's sales needs on hand. July 1 inventory is projected to be 1,500 units. Monthly costs are budgeted as follows: Fixed manufacturing costs $17,000 Fixed selling costs $10,000 Fixed administrative costs $8,300 Variable manufacturing costs $6 per unit produced Variable selling costs $3 per unit sold $32,000 $41,000 $46,400 $17,000
46,400 -Production for July is 4,000 + (40% × 6,000) - 1,500 = 4,900. Budgeted manufacturing overhead is (4,900 × $6) + $17,000 = $46,400. Selling and administrative costs are period costs and are not part of the budgeted manufacturing overhead.
Jillian Inc. produces leather handbags. The production budget for the next four months is: July 5,000 units, August 7,000, September 7,500, October 8,000. Each handbag requires 1.3 hours of unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much will be paid to skilled labor during the three months July through September? $742,500 $643,500 $4,387,500 $292,500
643,500 Production units, multiplied by skilled labor hours, multiplied by hourly rate for each month: (5,000 × 2.2 × $15) + (7,000 × 2.2 × $15) + (7,500 × 2.2 × $15) = $643,500 or [(5,000 + 7,000 + 7,500) × 2.2 × $15 = $643,500]
From a managerial perspective, which budget is most likely to motivate people to succeed in executing it?
A budget that is tight, but attainable because it creates the appropriate level of challenge.
Thunder Corp. has a selling price of $25 per unit, variable costs of $20 per unit, and fixed costs of $35,000. How many units must be sold to break even? A.) 7,000 B.) 14,000 C.) 3,500 D.) 2,334
A.) Calculate the break-even point by dividing fixed costs by the contribution margin. $35,000/($25 - $20) = 7,000
Keith Corp. has sales of $200,000, a contribution margin ratio of 35%, and a profit of $40,000. If 10,000 units were sold, what is the variable cost per unit? A.) $13.00 B.) $20.00 C.) $7.00 D.) $3.00
A.) Contribution margin is $200,000 × 35% = $70,000. Variable costs are $200,000 - $70,000 = $130,000. Per unit, this is $130,000/10,000 = $13.00. Alternatively, since the contribution margin is 35%, then the variable cost ratio is 65%, so total variable costs are $200,000 multiplied by 65% ($130,000). Total variable costs divided by the number of units equals variable cost per unit. ($130,000/10,000 = $13.00)
Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: Direct materials $12 Direct labor $8 VOH $12 FOH $8 Total unit cost $40 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. What is the maximum price Olive Corp. should pay the outside supplier? A.) $32 B.) $36 C.) $40 D.) $44 The incremental cost to make is $12 + $8 + $12 = $32, so Olive should pay no more than $32 to purchase from an outside supplier. Fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis.
A.) $32 The incremental cost to make is $12 + $8 + $12 = $32, so Olive should pay no more than $32 to purchase from an outside supplier. Fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis.
It costs Elmwood, Inc. $78 per unit to manufacture 1,000 units per month of a product that it can sell for $90 each. Alternatively, Elmwood could sell the units at an earlier stage of processing, which would save $36 per unit. Elmwood could sell the simpler product for $60 each. How would selling the simpler product affect Elmwood's profit? A.) Profit would increase by $6,000. B.) Profit would increase by $30,000. C.) Profit would decrease by $6,000. D.) Profit would decrease by $30,000.
A.) Profit will increase by $6,000 Cost saved $36,000 - Revenue lost $30,000 = $6,000
The budgeted income statement is a combination of:
All the operating budgets.
How might the budgeting process be used ethically within an organization?
An accounting manager implements budgeting procedures to measure the environmental impact of the production process, striving to reduce emissions from the factory. (She worries not enough emphasis is placed on the non-financial measures of success.)
Elk Corp. has sales of $300,000, a contribution margin ratio of 40%, and a target profit of $30,000. If 20,000 units were sold, what is the variable cost per unit? A.) $22.50 B.) $9.00 C.) $6.00 D.) $2.00
B.) Contribution margin is $300,000 × 40% = $120,000. Total variable costs are $300,000 - $120,000 = $180,000. Variable cost per unit is $180,000/20,000 = $9.00. Alternatively, if contribution margin ratio is 40%, then variable cost ratio is 60%, so sales multiplied by the variable cost ratio divided by units is the variable cost per unit. ($300,000 × 60% = $180,000/20,000 = 9 per unit)
What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable? A.) $500 loss B.) $79,000 loss C.) $33,500 profit D.) $213,000 profit
B.) 79,000 Contribution margin $101,000 - Fixed costs $180,000 = $(79,000). Since all the fixed costs are unavoidable, the other remaining division would have to absorb them if the Talbot division was dropped.
Dragon, Inc. has actual sales of $400,000 and a margin of safety of $150,000. What is Dragon's break-even point in sales? A.) $100,000 B.) $250,000 C.) $350,000 D.) $450,000
B.) Actual sales less margin of safety equals the break-even point. $400,000 - $150,000 = $250,000
Maggie Corp. has a selling price of $20 per unit, variable costs of $10 per unit, and fixed costs of $140,000. How many units must be sold to break even? A.) 7,000 B.) 14,000 C). 3,500 D.) 2,334
B.) Calculate break-even point in units by dividing fixed costs by the contribution margin per unit $140,000/($20 - $10) = 14,000
Quail, Inc., has a contribution margin of 40% and fixed costs of $130,000. What is the break-even point in sales dollars? A.) $52,000 B.) $325,000 C.) $225,000 D.) $78,000 Calculate the break-even point in sales dollars by dividing fixed costs by the contribution margin ratio. $130,000/0.40 = $325,000
B.) Calculate the break-even point in sales dollars by dividing fixed costs by the contribution margin ratio. $130,000/0.40 = $325,000
Which of the following is not a step in the managerial decision-making process? A.) Identify the decision problem. B.) Calculate the payback period. C.) Determine the decision alternatives. D.) Evaluate the costs and benefits of the alternatives.
B.) Calculate the payback period or 'Forecasting potential sales'
Be cautious of __________ expressed on a per-unit basis when weighing make-or-buy decisions. The total value (instead of the per unit value) is relevant to the decision. A.) variable costs B.) fixed costs C.) opportunity costs D.) relevant costs
B.) Fixed costs Total fixed costs (and whether or not they change based on the decision) are relevant, not necessarily fixed costs per unit.
Cost-volume-profit analysis assumes that total costs behave in a ________fashion. A.) Curvilinear B.) Linear C.) Exponential D.) Regressive
B.) Linear
Idaho Corp. has fixed costs of $20,000 and a contribution margin ratio of 50%. Currently, sales are $75,000. What is Idaho's margin of safety? A.) $28,000 B.) $35,000 C.) $42,000 D.) $70,000
B.) Sales less fixed costs divided by contribution margin ratio equals margin of safety. $75,000 - ($20,000/0.50) = $35,000
The basic form of the cash budget is:
Beginning cash balance + Budgeted cash collections - Budgeted cash payments +/- Cash borrowed or repaid = Ending cash balance -The formula for the cash budget is the sum of beginning cash balance and budgeted cash collections, les budgeted cash payments, plus or minus cash borrowed or repaid. This amount equals the ending cash balance.
Which of the following is correct about budgetary slack?
Budgetary slack is a bit of cushion built into a budget, making it more likely budgetary goals will be met.
Which of the following statements is not correct about cost-volume-profit analysis? A). CVP analysis is a decision-making tool for managers. B). CVP analysis focuses on the relationship among volume and mix of units sold, prices, variable costs, fixed costs, and profit. C). CVP analysis works best when all variables are changed concurrently. D). Managers use CVP analysis to evaluate how changing one key variable will impact profitability, while holding everything else constant.
C). CVP analysis works best when all variables are changed concurrently
Skyline Corp. has a selling price of $25 per unit, variable costs of $20 per unit, and fixed costs of $25,000. What sales revenue is needed to break-even? A.) $100,000 B.) $5,000 C.) $125,000 D.) $50,000
C.) Break-even point in units is $25,000/($25 - $20) = 5,000. Revenue = 5,000 × $25 = $125,000. Alternatively, break-even point is fixed costs divided by contribution margin ratio. $25,000/($5/$25 or 20%) = $125,000
Munoz Inc. has a contribution margin ratio of 30% and fixed costs of $90,000. What sales revenue is needed to generate a $60,000 profit? A.) $45,000 B.) $200,000 C.) $500,000 D.) $214,286
C.) Calculate target revenue by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($90,000 + $60,000)/0.30 = $500,000
Leather Company sold 20,000 units, had variable costs of $12 per unit, fixed costs of $100,000, and profits of $60,000. What is the selling price per unit? A.) $8 B.) $17 C.) $20 D.) $32
C.) The selling price per unit times the number of units sold, less the variable cost per unit times the number of units, less fixed costs equals profit. (20,000 × SP) - (20,000 × $12) - $100,000 = $60,000. SP = $20.00.
Skyline Corp. has a selling price of $25 per unit, variable costs of $20 per unit, and fixed costs of $25,000. What sales revenue is needed to break-even? A.) $100,000 B.) $5,000 C.) $125,000 D.) $50,000
C.) Break-even point in units is $25,000/($25 - $20) = 5,000. Revenue = 5,000 × $25 = $125,000. Alternatively, break-even point is fixed costs divided by contribution margin ratio. $25,000/($5/$25 or 20%) = $125,000
Munoz Inc. has a contribution margin ratio of 30% and fixed costs of $90,000. What sales revenue is needed to generate a $60,000 profit? A.) $45,000 B.) $200,000 C.) $500,000 D.) $214,286
C.) Calculate target revenue by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($90,000 + $60,000)/0.30 = $500,000
Martol, Inc. has fixed costs of $200,000 and a contribution margin ratio of 40%. How much sales revenue must be earned for a profit of $80,000? A.) $140,000 B.) $560,000 C.) $700,000 D.) $1,120,000
C.) Calculate target sales by adding fixed costs to target profit and dividing the result by the contribution margin ratio. ($200,000 + $80,000)/40% = $700,000
Paint Corp. has sales of $600,000, a contribution margin ratio of 30%, and a profit of $40,000. If 20,000 units were sold, what is the variable cost per unit? A.) $9.00 B.) $30.00 C.) $21.00 D.) $3.00
C.) Contribution margin ratio = $600,000 × 30% = $180,000. Variable costs are $600,000 - $180,000 = $420,000. Per unit, this is $420,000/20,000 = $21.00.
The accounting firm of Pie and Lowell is examining its client base to determine how profitable its regular clients are. Its analysis indicates that Chico, Inc. paid $116,000 in fees last year, but cost the firm $124,000 ($106,000 in billable labor, supplies, and copying, and $18,000 in allocated common fixed costs). If Pie and Lowell dropped Chico, Inc. as a client, and all fixed costs are unavoidable, how would profit be affected? A.) $0 B.) Increase $8,000 C.) Decrease $10,000 D.) Decrease $116,000
C.) Decrease $10,000 $116,000 - $106,000 = $10,000. Included in the cost is $18,000 of fixed costs that are unavoidable so these would be excluded from the analysis.
Which of the following budgets do not provide information needed for the budgeted balance sheet? A.) Materials purchases budget B.) Production budget C.) Selling and administrative expense budget D.) Cash budget
C.) Selling and administrative expense budget
Nancy Company has sales of $100,000, variable costs of $5 per unit, fixed costs of $25,000, and a profit of $15,000. How many units were sold? A.) 20,000 B.) 16,000 C.) 12,000 D.) 8,000
C.) Total sales less variable costs per unit times the number of units, less fixed costs equals profit. $100,000 - ($5 × Q) - $25,000 = $15,000, so Q = 12,000 units sold.
Which of the following is not another term for relevant costs? A.) differential costs B.) incremental costs C.) opportunity costs D.) avoidable costs
C.) opportunity cost -Opportunity costs may be relevant, but the two are not synonymous. Differential, incremental, and avoidable costs are all synonymous to relevant costs.
Which of the following is the backward-looking phase of the planning and control cycle? Planning Implementing Executing Control
Control -Controlling is the phase in which managers compare actual to budgeted results to determine whether the objectives set during the planning stage were met, and take corrective action where necessary.
Cranberry has received a special order for 100 units of its product at a special price of $2,100. The product normally sells for $2,800 and has the following manufacturing costs: DM- $840 DL- $420 VOH- $560 FOH- $700 UNIT COST- $2,520 Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit? A.) $42,000 decrease B.) $42,000 increase C.) $70,000 decrease D.) $28,000 increase
D.) ($2,100 - $840 - $420 - $560) × 100 = $28,000 increase fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis.
Pinto Co. has received a special order for 2,000 units of its product at a special price of $75. The product normally sells for $100 and has the following manufacturing costs: Per unit Direct materials $30 Direct labor $20 VOH $15 FOH $25 Unit cost $90 Assume that Pinto Co. has sufficient capacity to fill the order without harming normal production and sales. If Pinto Co. accepts the order, what effect will the order have on the company's short-term profit? A.) $30,000 decrease B.) $30,000 increase C.) $50,000 decrease D.) $20,000 increase
D.) ($75 - $30 - $20 - $15) × 2,000 = $20,000 increase. -Fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis
Megan, Inc. has fixed costs of $400,000, sales price of $40, and variable cost of $30 per unit. How many units must be sold to earn profit of $80,000? A.) 2,000 B.) 10,000 C.) 40,000 D.) 48,000
D.) Calculate target units by adding fixed costs to target profit and dividing the result by the per unit contribution margin. ($400,000 + $80,000)/($40 - $30) = 48,000
At a level of 20,000 units sold, Gail Corp. has sales of $400,000, a contribution margin ratio of 40%, and a profit of $40,000. What is the break-even point in units? 12,000 8,000 20,000 15,000
D.) Fixed costs are ($400,000 × 40%) - $40,000 = $120,000. Break-even point is $120,000/0.40 = $300,000 in sales and $300,000/$20 = 15,000 in units.
At a level of 20,000 units sold, Gail Corp. has sales of $400,000, a contribution margin ratio of 40%, and a profit of $40,000. What is the break-even point in units? A.) 12,000 B.) 8,000 C.) 20,000 D.) 15,000
D.) Fixed costs are ($400,000 × 40%) - $40,000 = $120,000. Break-even point is $120,000/0.40 = $300,000 in sales and $300,000/$20 = 15,000 in units
CHAPTER 8 Parker Corp expects to sell 4,000 units in October, and expects sales to increase 20% each month thereafter. Sales price is expected to stay constant at $8 per unit. What are budgeted revenues for the fourth quarter? A. $32,000 B. $96,000 C. $115,200 D. $116,480
D.) $116,480
Allen, Inc., has a contribution margin of 40% and fixed costs of $250,000. What is the break-even point in sales dollars? A.) $100,000 B.) $250,000 C.) $375,000 D.) $625,000
D.) Calculate break-even point by dividing fixed costs by the contribution margin ratio. $250,000/0.40 = $625,000
Frontier Corp. has fixed costs of $300,000 and profit of $150,000. What is its degree of operating leverage? A.) 0.33 B.) 1.67 C.) 2.50 D.) 3.00
D.) Contribution margin is $300,000 + $150,000 = $450,000. Degree of operating leverage is $450,000/$150,000 = 3.
Which of the following statements is not correct about the methods managers use to model the relationship between revenues, costs, profit, and volume? A.) Each method provides a different way to express the CVP relationships, yet answers the same basic question. B.) Choice of method depends, in part, on personal preference. C.) Choice of method depends, in part, on the available information. D.) Each method yields a different final answer to be used in analysis.
D.) Each method yields a different final answer to be used in analysis. -The method a manager uses to model the relationship between revenues, costs, profit, and volume yield the same final answer (not a different final answer) as long as managers have complete information.
The manager of Hampton, Inc. is trying to decide whether to make or buy a component of the product it sells. Which of the following costs and benefits is not relevant to the decision? A.) Direct labor cost involved in making the component B.) The purchase price of the component if it is bought C.) Variable manufacturing overhead involved in making the component D.)The selling price of the product
D.) Selling price of the product
Which of the following statements is correct about the break-even point? A.) The break-even point is the point where a company achieves its target profit. B.) The break-even point is the point where all variable costs are covered (but fixed costs are not). C.) The break-even point is the point where all fixed costs are covered (but variable costs are not). D.) The break-even point quantifies the number of units that must be sold to cover total costs with zero profit.
D.) The break-even point quantifies the number of units that must be sold to cover total costs with zero profit.
Which of the following statements about leverage is not correct? A.) Measuring the degree of operating leverage is a form of measuring risk. B.) Decisions about the use of debt or equity affect a company's financial leverage. C.) Decisions about whether to use fixed or variable costs affect a company's operating leverage. D.) The degree of financial leverage measures the extent to which fixed costs are used to operate the business.
D.) The degree of operating leverage, not financial leverage, measures the extent to which fixed costs are used to operate the business.
What is the term for the most constrained resource? A.)The contribution margin B.) The constrainment C.) The opportunity cost D.) The bottleneck
D.) the bottleneck
One advantage of participative budgeting is managers can build in budgetary slack.
False
The selling and administrative expense budget is based on the production budget.
False
A firm with a higher degree of operating leverage would be considered less risky than a comparable firm with a lower degree of operating leverage.
False -A company with a higher degree of operating leverage will experience larger swings in profit as a result of changes in sales revenue, and so it is usually considered to be more risky.
CHAPTER 7 : When managers make a decision, they base it strictly on the numerical analysis performed in step three of the decision making process.
False -Managers base decisions on the numerical analysis and a variety of other factors.
Operating budgets focus on the financial resources needed to support operations.
False -Operating budgets cover the organization's planned operating activities for a particular period; financial budgets focus on the financial resources needed to support operations.
The production budget must be prepared before the sales budget can be prepared.
False -The sales budget, not the production budget, is the starting point for preparing the master budget.
The selling and administrative expense budget is based on the production budget.
False -The selling and administrative expense budget includes all the costs related to selling the product and managing the business, not the costs of producing the product.
Creating a budget is an important part of which phase of the planning and control process? Planning Controlling Implementing Executing
Planning
CHAPTER 8 An advantage of budgeting is that it provides a benchmark for evaluating performance.
TRUE
Participative budgeting is more likely to motivate people to work toward the organization's goals than is a top-down approach.
TRUE
The formula for break-even point in terms of units is:
Total fixed costs/ Unit contribution margin
Manufacturing firms prepare a separate raw materials purchases budget for each material used in production.
True
If a company produces and sells goods to order, the sales budget and production budget are identical.
True -A company that produces and sells goods to order would not carry a finished goods inventory, which is the difference between a sales budget and a production budget.
Cost-Volume-Profit Analysis is
a decision making tool that focuses on the relationship among the volume and mix of units sold, prices, variable costs, fixed costs, and profit -allows managers to evaluate how changing one or more of these key variables will impact profitability, while keeping all else constant
Which of the following is not a key assumption of cost volume profit? a.) costs may be fixed, variable, mixed or step b.) production and sales are equal c.) changes in total cost are strictly due to changes in activity d.) total costs and revenues can be depicted with a straight line
a.) costs may be fixed, variable, mixed or step
The margin of safety is the difference between:
actual sales and break even sales
Target Profit Analysis is
an extension of break even analysis that allows managers to determine the number of units or total sales revenue needed to earn a target profit
When calculating raw materials purchases, the starting point should be:
budgeted production. -Raw materials to be purchased will be used in manufacturing the units to be produced, thus the starting point is budgeted production (not budgeted sales).
Degree of operating leverage is used to:
calculate profit change given sales change
A component of the financial budget is the:
cash budget
Degree of operating leverage is calculated as:
contribution margin divided by profit
A firm with a higher degree of operating leverage would be considered less risky than a comparable firm with a lower degree of operating leverage.
false
Cost volume profit analysis can only be performed for companies that sell only one product.
false
Cost-volume-profit analysis assumes that total costs behave in a curvilinear fashion
false
Degree of operating leverage is calculated by dividing sales by profit.
false
In multiproduct cost volume profit analysis, a break even point must be calculated separately for each product.
false
The margin of safety is a positive number at the break even point.
false
The margin of safety is the point where zero profit is earned.
false
The quality of the goods in question is irrelevant to a make-or-buy decision.
false
The target sales level equals fixed costs plus variable costs divided by the contribution margin ration.
false
On a CVP graph, the break even point is the point at which the contribution margin line crosses the total cost line.
false -The break-even point is the point at which the total revenue line crosses the total cost line.
To determine the number of units needed to earn a target profit, divide the target contribution margin by the contribution margin per unit.
false -divide total fixed costs plus profit by the contribution margin per unit.
The margin of safety is the difference between actual sales and budgeted sales.
false - The margin of safety is the difference between actual or budgeted sales and break-even sales.
Cost structure refers to:
how a company uses variable versus fixed costs
The margin of safety tells managers:
how much sales could drop before the firm no longer earns profits
Participative budgeting is an approach to budgeting that:
is more likely to motivate people to work towards the organization's goals than a top-down approach.
The number of units included in the production budget:
may differ from the number of units in the sales budget, depending on ending inventory goals.
What component of the profit equation should be set equal to zero to find the breakeven point?
profit
If production does not equal sales..
the conclusions it draws from a CVP analysis will not be as sound as they would be if production equaled sales
The break-even point is:
the point where zero profit is earned
In multiproduct cost volume profit analysis, an assumption made in addition to those used in single product CVP analysis is that:
the sales mix remains constant
If a firm sells more than one product, the breakeven point in units represents:
the sum of the units of all products required to break even
Profit is indicated on a cost volume profit graph by:
the vertical difference between the revenue line and the cost line
The formula for break even point in terms of revenue is:
total fixed costs/contribution margin ratio
An important assumption in multiproduct cost volume profit analysis is the sales mix remains constant.
true
An opportunity cost is the foregone benefit of choosing to do one thing instead of another.
true
Break even units can be found by dividing fixed costs by unit contribution margin
true
Contribution margin is equal to fixed costs at the break even point.
true
Cost-volume-profit analysis assumes that all costs can be accurately described as either fixed or variable.
true
If machine hours are a constraining factor, the product with the highest contribution margin per machine hour should be prioritized in production
true
Managers can use cost volume profit analysis to evaluate changes in cost structure.
true
Managers can use cost volume profit analysis to evaluate changes in price.
true
Opportunity costs are not relevant when a company has idle capacity.
true
Target units equals fixed costs plus target profit divided by the unit contribution margin.
true
The break even point is the point at which profit equals zero.
true
The degree of operating leverage can be multiplied by a change in sales to determine change in profit.
true
The degree of operating leverage can be multiplied by a change in sales to determine the change in profit.
true
