managerial accounting test 2
Variable vs. Absorption Costing
ABSORPTION COSTING- fixed manufacturing costs must be assigned to products to properly match revenues and costs VARIABLE COSTING- fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced
What type of costing is required for external reports?
Absoprtion
Financial statement users need to be aware of changes in inventory levels when using ___ costing
Absorption
Is cost of goods sold higher in absorption or variable costing?
Absorption
Is net operating income higher in absorption or variable costing?
Absorption
What is the relationship between absorption and variable incomes if there's no change in inventory?
Absorption = variable
Which costing method will produce the highest values for working in progress and finished goods inventories?
Absorption costing
Which type of costing is affected by changes in unit sales and units of production?
Absorption costing
What is the relationship between absorption and variable incomes if inventory increases?
Absorption is greater than variable
What is the relationship between absorption and variable incomes if the inventory decreases?
Absorption is less than variable
The equation and formula methods used to determine the unit sales and dollar sales needed to achieve a target profit of zero
Break- even analysis
When total revenue equals total costs is called the ________?
Break- even point
A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) ___ fixed cost
Common
Traceable costs can become ___________?
Common costs
Which fixed costs arise because of the overall operation of the company and wouldn't disappear if any particular segment were eliminated
Common fixed costs
segment margin equation
Contribution Margin - Traceable fixed costs
Helpful in judging the impact on profits of changes in selling price, cost, or volum
Contribution income statement
The amount remaining from sales revenue after variable expenses has been deducted
Contribution margin
A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company has an overall net operating ________
Loss of $10,000
The excess of budgeted or actual sales dollars over the break-even volume of sales dollars
Margin of safety
What is net income shown for on a segmented income statement?
The company has a whole
Who has some say in the cost structure of an organization?
The managers
What is the amount called when sales can drop before losses are incurred?
The margin of safety
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.
If the total contribution margin is less than the total fixed expenses, a ___ occurs
Net loss
Do you need to prep the income statement to figure out profits for a specific sales volume?
No
If a segment is entirely eliminated, common fixed costs will ___
Not change
Segment break-even calculations include ___ fixed expenses
Only traceable
A measure of how sensitive net operation income is to percentage changes in sales
Operating leverage
Decision-making problems that could occur when using absorption costing include inappropriate ___ decisions, and decisions made to ___ products that are, in fact, profitable
Pricing; drop
When a segment cannot cover its own costs, that segment should ___
Probably be dropped
In a CVP graph, what is the top shaded portion?
Profit
The profit graph is based on the following linear equation: a. Profit = Unit CM x Q - Fixed Expenses. b. Sales = Unit CM - Unit Variable Cost. c. Profit = Unit CM x Q + Fixed Expenses. d. Profit = Selling Price x Q - Unit CM x Q.
Profit = Unit CM x Q - Fixed Expenses.
Contribution Format Income Statement
Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income
What are the two lines on a CVP graph?
Sales and variable expenses
Any part or activity of an organization about which a manager seeks cost, revenue, or profit data
Segment
The best gauge of the long-run profitability of a segment
Segment margin
Assigning common fixed costs to segments impacts ___
Segment margin only
From a decision making point of view, ___ margin is most useful for major capacity decisions and ___ margin is most useful for short-term sales volume decisions
Segment; contribution
Estimates what sales volume is needed to achieve a specific target profit
Target profit analysis
What does the green line in the CVP graph indicate? a. Total fixed costs b. Total expenses c. Total variable costs d. Total sales revenue
Total expenses
The break-even point is reached when the contribution margin is equal to ___
Total fixed expenses
Only costs that would disappear over time if a segment disappeared should be treated as ___ fixed costs
Traceable
The segment margin equals the segment's contribution margin less the segment's ___ fixed costs
Traceable
Which fixed costs arises because of the existence of a particular segment and would disappear over time if the segment itself disappeared
Traceable fixed costs
Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax for the store is a(n) ___ fixed cost for the store, and a(n) ___ fixed cost for each product line sold in the store
Traceable; common
The segment margin is obtained by deducting the ___ fixed costs of a segment from the segment's ___
Traceable; contribution margin
A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments (T or F)
True
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
how can the relationships among revenue, cost, profit, and volume be expressed
graphically, by preparing a CVP graph
Advantage of high fixed cost structure
income will be higher in good years compared to companies with lower proportion of fixed costs
Disadvantage of high fixed cost structure
income will be lower in bad years compared to companies with lower proportion of fixed costs
variable costing income
is only affected by changes in unit sales. It is not affected by the number of units produced. - as a general rule, when sales go up, net operating income goes up and vice versa
once a company prepares a contribution format segmented income statement
it can use the statement to make decisions and perform break even analysis
Which of the following methods do managers use to estimate the fixed and variable components of mixed costs by analyzing past records of cost and activity data?a. scattergraph b. account analysis c. least-squares regression
least-squares regression
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
companies with ____ fixed cost structures enjoy greater stability in income across good and bad years
low
commissions based on sales dollars can lead to
lower profits in a company
the ______________________ is the excess budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred.
margin of safety
if a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break even point in units will:
not change
in ______________, we estimate what sales volume is needed to achieve a specific target profit
target profit analysis
contribution margin is
the amount remaining from sales revenue after variable expenses have been deducted
segment margin is
the best gauge of the long run profitability of a segment
the higher the margin of safety,
the lower the risk of not breaking even and incurring a loss
When using least-squares regression, R2 represents ________. a. the intercept of a line b. the measure of goodness of fit c. the slope of a line
the measure of goodness of fit
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 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
Break-even point is the level of sales at which ______. a. total profits equals total costs b. total profits exceed total costs c. total revenue equals total costs d. total sales equal total projections
total revenue equals total costs
break even point is the level of sales at which
total revenue equals total costs
t/f: the contribution margin income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior.
true
t/f: traceable fixed costs of one segment may be common fixed cost of another segment
true
Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.
unit contribution margin
Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold. a. unit contribution margin b. unit selling price c. variable expense per unit d. fixed expense per unit
unit contribution margin
what is represented on the X-axis of a cost volume profit (CVP) graph?
unit volume
which of the following costing approaches is best suited for cost volume profit analysis
variable
which of the following costing approaches is best suited for cost-volume profit analysis?
variable
absorption costing income statements ignore
variable and fixed cost distinctions
variable costing categorizes costs as
variable and fixed so it is much easier to use this income statement format for CVP analysis
_______________ correctly identifies the additional variable costs incurred to make one more unit. It also emphasizes the impact of total fixed costs on profits
variable costing
under _______________, only the variable production costs are included in the product costs
variable costing
what is usually plotted as a horizontal line on the CVP graph?
fixed expenses
there are two keys to building segmented income statements:
1. a contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin 2. traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin
inappropriate methods of allocating costs among segments
1. failure to trace costs directly: costs that can be traced directly to specific segments of a company should not be allocated to other segments 2. inappropriate allocation base: some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments only when the allocation base actually drivers the cost being allocated
To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:
1. selling price is constant. The price of the product or service will not change as volume changes 2. costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. in multi product companies, the mix of products sold remains constant.
what are some examples of common fixed costs?
1. the salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors 2. The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the various departments
what are some examples of traceable fixed costs?
1. the salary of the Fritos product manager at Pepsi Co is a traceable fixed cost of the Fritos business segment of Pepsi Co 2. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing
Common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" for two reasons:
1. this practice may make a profitable business segment appear to be unprofitable 2. allocating common fixed costs forces manager to be held accountable for costs they cannot control
If you sell one more unit, operating income will increase by...
1x the contribution margin per unit
To find out how much our net operating income will increase based on a specific increase in sales revenue: we use the _________?
Contribution margin ratio
What does the contribution income statement have an emphasis on?
Cost behavior
Refers to the types and relative proportion of fixed and variable costs in an organization
Cost structure
What are the axes on a CVP graph?
Dollars (y- axis) Units (x- axis)
Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ___ the increase in net operating income
Equal to
Segment margin is most useful in decisions involving short-run changes in sales volume such as pricing special orders (T or F)
False
In order to break even, the contribution margin must equal _________?
Fixed expenses
What is usually plotted as a horizontal line on the CVP graph? a. Fixed expenses b. Variable costs c. Sales revenues d. Break-even volume
Fixed expenses
Absorption costing net operating income may not agree with the net operating income calculated for CVP analysis due to the way in which ___ is handled in absorption costing
Fixed manufacturing overhead
Contribution margin is first used to cover ___ expenses. Once the break-even point has been reached, contribution margin becomes ___
Fixed; profit
_____________________ require publicly traded companies to include segmented financial data in their annual reports - helps avoid the contribution approach when it comes to internal reporting
GAAP and IFRS
What are the benefits of a low fixed cost structure?
Greater stability in income
The company-wide break-even sales will always be ___ the sum of the segment break-even sales
Higher than
When units sold exceed units produced, net income under variable costing will generally be ___ net income under absorption costing
Higher than
Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will ___ in total as the number of units produced increases
Increase
absorption costing income
Influenced by changes in unit sales and units of production. Net operating income can be increased simply by producing more units even if those units are not sold.
The contribution margin statement is primarily used for ___
Internal decision making
Where does fixed manufacturing overhead from the variable cost income statement go in the absorption cost income statement?
It gets absorbed into cost of goods sold
In a CVP graph, what is the bottom shaded portion?
Loss
Segment contribution margin equals segment revenue minus the ___ expenses for the segment
Variable
The number of units produced does not affect net operating income when using ___ costing
Variable
Which type of costing is affected by changes in unit sales?
Variable costing
Which type of costing is better for CVP analysis?
Variable costing
Excel depicts the least-squares regression results using the equation form _______. a. Y = ax + b b. Y = bx + a c. Y = a + b
Y = bx + a
Can a traceable fixed cost also be a common fixed cost?
Yes but in different segments
under ________________, all production costs, variable and fixed, are included when determining unit product cost
absorption costing
costs assigned to a segment should include
all costs attributable to that segment from the company's entire value chain
traceable fixed costs
arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared
common fixed costs
arise because of the overall operation of the company and would not disappear if any particular segment were eliminated
what is used first to cover fixed expenses?
contribution margin - any remaining CM contributes to net operating income
when a company sells more than one product,
break even analysis becomes more complex
with regards to interpretation, what are the important areas that appear on a CVP graph?
break-even point, loss area, and profit area
moss feet shoe corporation is a single product firm. The company is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for the next year?
contribution margin ratio: increase break-even point: decrease
___________________ refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure
cost structure
A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________. a. decrease b. increase c. remain the same
decrease
t/f: the smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses
false
The measure of how sensitive net operating income is to a given percentage change in dollar sales is called _______. a. sensitivity leverage b. operating leverage c. risk leverage
operating leverage
_________________________ is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits
operating leverage
the measure of how sensitive net operating income is to a given percentage change in dollar sales is called
operating leverage
the relationship between profit and the CM ratio can be expressed using the following equation:
profit = (CM ratio x Sales) - fixed expenses
the contribution format income statement can be expressed in the following equation:
profit = (sales - variable expenses) - fixed expenses
we can calculate break even by solving the equation:
profit = unit CM x Q - fixed expenses
the profit graph is based on the following linear equation:
profit= unit cm x Q - fixed expenses
Contribution margin equals ________. a. sales minus fixed cost b. fixed cost minus variable cost c. sales minus variable cost minus fixed cost d. sales minus variable cost
sales minus variable cost
contribution margin equals
sales minus variable costs
What is represented on the X axis of a cost-volume-profit (CVP) graph? a. Sales revenue b. Fixed cost c. Sales volume d. Variable cost
sales volume
a _____________ is any part of activity of an organization about which a manager seeks cost, revenue, or profit data ex: individual store, sales territory, service center
segment
