Exam 2 Managerial Accounting: Chapter 5 & 6

CVP primary purpose is to estimate how profits are affected by the following five factors:

1. Selling prices 2. Sales volume 3. Unit Variable costs 4. Total fixed costs 5. Mix of products sold

Decide how each cost is treated on an income statement prepared using the variable costing approach. Fixed selling administrative expenses- Variable selling and administrative expenses-

Period costs Period costs

Decide how each cost is treated on an income statement prepared using the variable costing approach. Direct labor- Fixed manufacturing overhead- Variable manufacturing overhead-

Product cost period cost product cost

Degree of operating leverage

A measure, at a given level of sales, of how a percentage change in salesvolume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income.

Contribution margin ratio (CM ratio)

A ratio computed by dividing contribution margin by sales.

Variable expense ratio

A ratio computed by dividing variable expenses by sales.

Incremental analysis

An analytical approach that focuses only on those costs and revenues that change as a result of a decision.

Segment

Any part or activity of an organization about which managers seek cost, revenue, or profit data.

Target profit analysis

Estimating the level of sales needed to achieve a desired target profit.

When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

is greater then

When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

is less than

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

Operating leverage

A measure of how sensitive net operating income is to a given percentage change in unit sales.

Max, Incorporated, has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000, respectively. What is the segment margin for the South Division?

$200,000

Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. Assuming the traceable fixed costs of the television division are $300,000, what is the segment margin of the mobile phone division?

$400,000

Excerpt from Areojet Corporation records for month of February: Selling price- $ 200,000 Direct materials used in production-40,000 Direct labor- 10,000 Variable manufacturing overhead-2,000 Fixed manufacturing overhead-$ 140,000 Variable selling and administrative expenses- 20,000 Fixed selling and administrative expenses -40,000 Assuming the variable costing method is used, what is the total manufacturing costs added to work in process during the month of February?

$52,000

Cost-volume-profit (CVP) graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.

Absorption costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.

Variable costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.

Margin of safety

The excess of budgeted or actual dollar sales over the break-even dollar sales.

Break-even point

The level of sales at which profit is zero.

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.

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.

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

Variable

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

fixed overhead costs

When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method.

is equal to

Absorption costing income statements ignore ________.

variable and fixed cost distinctions