Acty 2110 Exam 2

contribution format income statement -

the financial statement that organizes costs by their behavior instead of their function

in cost volume profit analysis

- all costs can be classified as either fixed or variable - production volume is equal to sales volume - in multi product companies, the sales mix is constant

variable cost -

a cost that changes in direct proportion to changes in the activity level

two general costing methods used by manufacturing companies to value inventory and cost of goods sold are

absorption and variable costing

target profit analysis

an extension of break-even analysis that allows managers to determine units or sales needed to achieve an earning's goal

multi-product target profit analysis a. does not calculate the total units of each individual product b. depends upon the sales mix c. is calculated the same way as single product analysis

b and c

assume that a company sells 5,000 units per month at a price of $50 per unit. If the company computes net operating income using absorption costing, the net income will be

highest when units produced exceeds units sold

cost behavior -

how a cost reacts to changes in the level of activity

cvp analysis can help answer the question of

how net income can be increased

Unit Contribution Margin

the amount that each unit sold contributes to fixed costs and profit is

the single point where the total revenue line crosses the total expense line on the cvp graph indicates

the break-even point (profit = 0)

relevant range -

the level of activity over which cost behavior assumptions are true

in a least- squares regression line, the vertical intercept of the line represents

total fixed costs

break-even point is reached when

total revenue is equal to total costs

profit equation method

total sales revenue - total variable costs - total fixed costs = profit

when preparing a cvp graph, the slope of the total cost line represents

variable costs per unit

the term cost structure refers to how a company uses ___________ costs versus _________ costs in its operations.

variable, fixed

Given net operating income of $50,000, contribution margin of $150,000, and sales of $300,000, the degree of operating leverage is

$150,000/ $50,000 = 3

given total fixed costs of $35000 and a contribution margin ratio of 40%, ____________ of revenue must be earned to break-even.

$35000 / 40% = $87500

bakers contribution margin ration is 60 % which means that a $7000 increase in sales will result in a $________increase in net operating income.

$7000 x 60% = $4200

Larson's Ltd. sells its products for $12.00 per unit. The contribution margin per unit is $8.00 and fixed costs are $75,000. Larson has to sell to ________ units to break-even.

$75,000 / $8.00 = 9,375 units

Chitter-Chatter sells phones and has a set target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total are________.

($975,000 + $195,000)/.65= $degree1,800,000

what happens when the number of units produced equals the number of units sold?

- all fixed OH incurred flows to the income statement under both costing methods - absorption costing net income is equal to variable costing total expense

absorption costing and variable costing net operating income will be

- equal when the number of units produced equals the number of units sold - equal when there is no beginning and no ending inventory

multi-product target profit analysis

- is calculated the same way as single product analysis - depends upon the sales mix

fixed costs should not be expressed on a per unit basis because

- it makes managers believe they can reduce costs by producing more - the average cost per unit decreases as more units are produced

T or F: Variable costs remain fixed in total within the relevant range of activity

False

T or F: The key to most managerial decisions is understanding cost behavior.

True

A contribution margin income statement a. separates costs into their fixed and variable components b. reports both gross margin and net income c. can assist with management decision making

a and c

CVP a. can be used to make many different decisions b. can be used for "what-if" analysis c. allows managers to see how changing one variable can impact another

a, b, and c

Which of the following statements are true? a. outside of the relevant range cost behavior conclusions may not be valid b. the relevant range of activity is approximated by a straight line c. within the relevant range of activity, fixed costs remain constant in total d. within the relevant range of activity total variable costs do not change

a, b, and c

fixed costs a. should not be expressed on a per unit basis when making decisions b. per unit become progressively larger as the level of activity increases c. generally include rent and supervisor salaries d. remain constant in total within the relevant range of activity

a, c, and d

The break-even point can be affected by a. sales mix b. net operating income c. total fixed costs d. product mix

a, c, d

CVP analysis

can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, and fixed costs.

after fix costs have been covered, what becomes net operating income?

contribution margin

sales revenue - variable costs =

contribution margin

degree of operating leverage

contribution margin / net operating income

the weighted average contribution margin ratio is based on the relative percentage of total sales revenue in

dollars, not units

variable costing -

fixed manufacturing OH is treated as a period cost and expensed in full each period

absorption costing -

fixed manufacturing OH is treated as part of the per unit product cost and expensed as units are sold

a statistical technique for finding the best fitting line based on historical data is

least square regression

The excess of the budgeted sales dollars over break-even sales is called

margin of safety

margin of safety %

margin of safety in dollars / total budgeted sales in dollars

decisions about whether to use fixed or variable costs to run a business affects a company's

operating leverage

according the assumptions of cvp, _________will not change as the volume of a product increases or decreases

price

contribution format income statement

sales - variable expenses _____________________________ contribution margin - fixed expenses _____________________________ net operating income

income statement using absorption costing

sales - total cost of goods sold ________________________________ = gross margin - total selling and administrative expenses ________________________________ = Net operating income

a visual representation of the relationship between cost and activity is provided by

scattergraph