MGMT 201 Exam 2 Review

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

T or F: For October, the beginning WIP Inventory was $30,000 while the ending WIP Inventory was $40,000. $200,000 in units were transferred out, and $120,000 in costs were added during the period.

$30,000 + $120,000 = $40,000 + $200,000 FALSE: $150,000 /=/ $240,000

Which of the following are assumptions of cost-volume-profit analysis?

1. Costs are linear and can be accurately divided into variable and fixed elements. 2. in multi product companies, the sales mix is constant

Which of the following statements are correct regarding income statements prepared under variable and absorption costing?

1. Reported net income on the statements differ 2. Both income statements include product and period costs

Which of the following items are found above the contribution margin on a CM format income statement?

1. Sales 2. Variable Expenses

Order of format income statement:

1. Sales 2. Variable Expenses 3. Contribution Margin 4. Fixed Expenses 5. Net Operating Income

To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:

1. Selling price is constant 2. Costs are linear and can be divided into variable and fixed components. 3. In multiproduct companies, the mix of products sold remains constant.

The Lafayette Division has: * $20,000 in traceable fixed costs * $80,000 in sales * $30,000 in variable costs (including COGS) What is the CM Ratio?

= $80,000 - $60,000 / $80,000

The Lafayette Division has: * $20,000 in traceable fixed costs * $80,000 in sales * $30,000 in variable costs (including COGS) What is the division margin?

= $80,000 - ($30,000 + $20,000)

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units?

= 1,150 cups Break-Even = Fixed expenses / CM per Unit = 1,300 / ($1.49/cup - $0.36/cup) =$1,300 / $1.13/cup

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage?

= 2.21 Operating Leverage = Contribution Margin / Net Operating Income = $2,373 / $1,073

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch?

CM Ratio = 0.758 = Unit Contribution Margin / Unit Selling Price = ($1.49 -$0.36) / $1.49 = $1.13 / $1.49

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

Which format of income statement is used under Variable Costing

Contribution

CVP is the acronym for __-__-__

Cost Volume Profit

The journal entry to record direct materials costs in processing Department #1 is debit ____ .

D: WIP Department #1 C: Raw Materials

Prime Costs

DL + DM

Total Production Cost

DL + DM + MOH Conversion + DM Prime + MOH

Conversion Costs

DL + MOH

Variable Costing Product Costs

DM, DL, VMOH

Absorption Costing Product Costs

DM, DL, VMOH, FMOH

Variable Costing Period Costs

FMOH, VS&A, FS&A

T or F: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.

False

T or F: Simple CVP analysis can be relied on for changes in volume outside the relevant range.

False

T or F: If Variable Expenses are lower than Sales Revenue, then CM and NOI will be positive

False (CM will be positive, but NOI could be negative if FE > CM)

T or F: If the CM/unit is $0, the NOI will be $0

False If there are any Fixed Expenses, NOI will be negative

Total contribution margin =

Fixed Expenses + Net Operating Income

Fixed manufacturing overhead costs are included as part of WIP inventory under _____ .

absorption costing only

When production is completed in the last processing department, units are transferred to the _____ _____ accounts.

finished goods

In process costing, manufacturing overhead costs are distributed to each department _____ .

according to the amount of the allocation base incurred in the department

Variable costing income statements are based upon a _____ format.

contribution

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ____ approach

contribution margin

A processing department produces _______ units.

homogeneous

The contribution margin statement id ordinarily used by those ______ .

inside the company only

The two common methods for determining unit product costs are _____ costing.

job-order and process

Job-order costing is used for _______

many different products with unique production requirements

If the total contribution margin is less than the total fixed expenses; a _____ occurs.

net loss

Direct costing or marginal costing are other terms for ____ costing

variable

The variable costing income statement separates _____ .

variable and fixed expenses

A processing department is an organization unit _____ .

where work is performed on a product, and materials, labor or overhead are added

When using process costing, each processing department has a separate _____ ___ _____ account.

work in process

Absorption costing treats fixed manufacturing overhead as a ____ cost

product

Absorption costing treats fixed manufacturing overhead as a ______ cost.

product

Sarah's selling price is $120/unit and she sold 4,000 units this period. She produced 5,000 units, including the following costs: Variable: * DM: $8/unit * DL: $5/unit * MOH: $2/unit Fixed (per month): * MOH: $60,000 * SG&A: $25,000 Calculate the unit product costs under Variable Costing

$15

Put'er There manufactures baseball gloves. Each glove requires $22 of direct materials and $18 of direct labor. Variable manufacturing overhead cost is $7 per unit and fixed manufacturing overhead cost is $19,000 in total. Variable selling and administrative costs are $11 per unit sold and fixed selling and administrative costs are $13,200. Last period, 800 gloves were produced, and 585 gloves were sold. The unit product cost using variable costing is ______ per unit.

$22 + $18 + $7 = $47. Selling and administrative costs are never considered part of product cost.

Sarah's selling price is $120/unit and she sold 4,000 units this period. She produced 5,000 units, including the following costs: Variable: * DM: $8/unit * DL: $5/unit * MOH: $2/unit Fixed (per month): * MOH: $60,000 * SG&A: $25,000 Calculate the unit product costs under Absorption Costing

$27

Citrus Scents produces body sprays. Each bottle has a unit product cost of $5.38. The company produced 1,490 bottles this month and sold 1,203 of those bottles. Total cost of goods sold was:

$5.38 × 1,203 = $6,472.14

Calculate the unit product cost under absorption costing. Direct materials: $50/unit; Direct labor: $75/unit; Variable manufacturing overhead: $27/unit; Fixed manufacturing overhead: $30,000; Units produced: 10,000; Units sold: 6,000.

$50 + $75 + $27 + ($30,000 ÷ 10,000) = $155 per unit

Pearls, Pearls, Pearls! manufactures and sells jewelry. The total variable cost of goods sold this month is $72,490. Variable selling and administrative cost is $22 per unit sold. If 350 units are produced and 314 units are sold this month, the total variable cost reported on the income statement for the month is $______.

$79,398 72,490 + ($22 x 314)

The Quaint Quilt produces and sells handmade quilts. Variable manufacturing costs total $140 per quilt. Fixed manufacturing overhead totals $68,250 per quarter. Variable selling and administrative costs are $19 per quilt sold, and fixed selling and administrative costs are $50,000 per quarter. Last quarter, the company produced 910 quilts and sold 780 quilts. The total variable cost reported on Quaint Quilt's variable costing income statement is _____ .

($140 + $19) × 780 quilts sold = $124,020

4 parts to a Cost Reconciliation Report

(Cost of Beg. WIP ) + (Cost Added to Production) = (Cost of End WIP) + (Cost of Units Transferred Out)

Citrus Scents produces body sprays. Variable selling and administrative expense is $1.05 per bottle and fixed selling and administrative expense is $4,500 per month. The company produced 1,490 bottles this month, and sold 1,203 of those bottles. Total selling and administrative expense for the month was ______.

(Units Sold * Variable Admin Expenses) + Fixed Admin Expenses $5763.15

CVP analysis focuses on how profits are affected by:

1. Unit variable cost 2. Selling price 3. Sales volume 4. Mix of products sold 5. Total fixed costs

Product costs under absorption costing include _____ .

1. Variable Manufacturing Overhead 2. Fixed Manufacturing Overhead 2. Direct Labor 3. Direct Materials

For external reporting, income statements are generally prepared using _____ costing, while _____ costing is used for internal decision making purposes.

1. absorption 2. variable

Variable costing net income may be computed by multiplying the number of units sold by the ______ _____ per unit and subtracting total _____ expenses.

1. contribution margin 2. fixed

Contribution margin is first used to cover ____ expenses. Once the break-even point has been reached, CM becomes _____ .

1. fixed 2. profit

The contribution margin income statement allows users to easily judge the impact of a change in ____ on profit.

1. selling price 2. cost 3. volume

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

Would NOI be >, < , or = between Absorption & Variable Costing if the same # of units were produced and sold?

=

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars?

= $1,715 = Fixed Expenses / CM Ratio = $1,300 / 0.758

Grace's October costs include the following: * DM: $4/unit * DL: $6/unit * V. MOH: $1/unit * F. MOH: $2/unit * Selling & Admin: $3/unit What is the product cost per unit under Variable Costing?

= $11 = DM + DL + VMOH = $4 + $6 + $1

Grace's October costs include the following: * DM: $4/unit * DL: $6/unit * V. MOH: $1/unit * F. MOH: $2/unit * Selling & Admin: $3/unit What is the product cost per unit under Absorption Costing?

= $13 = DM + DL + VMOH + FMOH = $4 + $6 + $1 + $2

Sarah's costs to produce 5,000 units include the following: Variable: * DM: $8/unit * DL: $5/unit * MOH: $2/unit Fixed: * MOH: $60,000 * SG&A: $25,000 What is the unit product cost under Variable costing?

= $15 = DM + DL + VMOH = $8 + $5 + $2

Suppose square feet is used as the basis for allocating the common fixed expense of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 b. $30,000 c. $40,000 d. $50,000

= $20,000 The bar would be allocated 1/10 of the cost or $20,000

The Lafayette Division has: * $20,000 in traceable fixed costs * $80,000 in sales * $30,000 in variable costs (including COGS) What is the segment's break-even point (in $)?

= $20,000 / 0.625

Sarah's costs to produce 5,000 units include the following: Variable: * DM: $8/unit * DL: $5/unit * MOH: $2/unit Fixed: * MOH: $60,000 * SG&A: $25,000 What is the unit product cost under Absorption costing?

= $27 = (DM + DL + VMOH) + (FMOH / Units) = ($8 + $5 $2) + ($60,000 / 5,000)

Grace's October costs include the following: * DM: $4/unit * DL: $6/unit * V. MOH: $1/unit * F. MOH: $2/unit * Selling & Admin: $3/unit What is the period cost per unit under Absorption Costing?

= $3 = SG & A

Grace's October costs include the following: * DM: $4/unit * DL: $6/unit * V. MOH: $1/unit * F. MOH: $2/unit * Selling & Admin: $3/unit What is the period cost per unit under Variable Costing?

= $5 = FMOH + SG&A = $2 + $3

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine the sales dollars that must be generated to attain target profits of $2,500 per month.

= $5,013 Sales $ to attain target profit = Target profit + Fixed Expenses / CM Ratio = $2,500 + $1,300 / [($1.49 - $0.36) / $1.49)] = $3,800 / 0.758

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain target profits of $2,500 per month.

= 3,363 cups Unit Sales to Attain Target Profit = (Target Profit + Fixed Expenses) / Unit CM = $2,500 + $1,300 / ($1.49 - $0.36) = $3,800 / $1.13

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300, and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase?

= 44.2% Percent increase in sales * Degree of operating leverage = Percent increase in profit = 20% * 2.21

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. What is the margin of safety expressed in cups?

= 950 cups Margin of Safety = Total Sales - Break-Even Sales = 2,100 cups - 1,150 cups

Which method will produce the highest values for WIP and Finished Goods inventories?

Absorption Costing

What category does Job-Order Costing fall under?

Absorption costing

What category does Process Costing fall under?

Absorption costing

Will CoGs be higher under Variable or Absorption costing?

Absorption, because included an additional category (FMOH)

Contribution Margin = Sales - ______

All variable costs

How is the Segmented Income Statement different than a normal income statement?

Breaks down into segments and has "Traceable Fixed Expenses" and "Division Margin"

Granny's Touch manufactures and sells cookbooks. The company's variable cost of goods sold is $39,200 and variable selling and administrative expense is $6,200. Fixed manufacturing overhead is $19,700 and fixed selling and administrative expense is $9,290. An income statement prepared using variable costing shows $______ as the total fixed expenses

Fixed Expenses = Fixed manufacturing overhead + Fixed selling and administrative expense = $19,700 + $9,290

Why is NOI under Variable Costing Less than under Absorption?

Fixed MOH

When using costing, which of the following can be added in any department?

Materials, labor and overhead

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 ______.

Net Operating Income = Contribution Margin - Fixed Costs Total NOI = $99,000

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000

Should commissions be based on Sales? Why or why not?

No, should be based on CM, NOT sales (salespeople will disregard variable costs to achieve higher sales; may sabotage coworkers to make more money)

How much of the common fixed expense of $200,000 can be avoided by eliminating the bar?

None of it Common fixed expenses cannot be eliminated by dropping one of the segments

Segmented Income Statement

Sales Variable CoGS Variable SG&A Contribution Margin Traceable Fixed Expenses Division Margin NOI

Sarah's selling price is $120/unit and she sold 4,000 units this period. She produced 5,000 units, including the following costs: Units sold: 4,000 Units produced: 5,000 Selling price: $120 Unit product cost: * $27 (absorption) * $15 (variable) Fixed (per month): MOH: $60,000 SG&A: $25,000 Absorption Costing Income Statement

Sales - $480,000 CoGS - $108,000 Gross Margin - $372,000 SG&A - $25,000 NOI - $347,000

Sarah's selling price is $120/unit and she sold 4,000 units this period. She produced 5,000 units, including the following costs: Units sold: 4,000 Units produced: 5,000 Selling price: $120 Unit product cost: * $27 (absorption) * $15 (variable) Fixed (per month): MOH: $60,000 SG&A: $25,000 Variable Costing Income Statement

Sales - $480,000 CoGS - $60,000 V. SG&A - $0 CM - $420,000 F. MOH - $60,000 F. SG&A - $25,000 NOI - $335,000

Sleep Tight manufactures pillows. The company incurred $42,000 of fixed manufacturing overhead cost this year. Variable unit product cost was $17. Variable selling and administrative cost was $9 per unit and fixed selling and administrative expenses totaled $59,000. The company manufactured 28,000 pillows and sold 15,408. Total fixed expenses on the variable costing contribution format income statement equal:

Total Fixed Expenses = Fixed Manufacturing Overhead Cost + Fixed Selling and Administrative Expenses $42,000 + $59,000 = $101,000

Which format of income statement is used under Absorption Costing?

Traditional

T or F Process costing is used when a company produces a continuous flow of units that are homogenous.

True

T or F: The flow of costs through manufacturing accounts is basically the same for job-order costing and process costing.

True

T or F: If the CM is $0, the CM/unit will be $0

True (CM/unit = CM / # of units)

T or F: if Fixed Expenses are lower than the CM, the NOI will be postive

True NOI = CM - FE

Frames, Inc. manufactures large wooden picture frames. Each frame requires $19 of direct materials and $40 of direct labor. Variable manufacturing overhead cost is $9 per frame produced, and variable selling and administrative expense is $13 per frame sold. The company produces 5,000 units each month and total fixed manufacturing overhead cost per month is $15,000. The unit product cost of each frame using variable costing is $_____.

Unit Product Cost (VC): Direct Labor + Direct Materials + Variable Manufacturing Overhead $68

Blissful Breeze manufactures and sells ceiling fans. Each fan has a unit product cost of $112 and a unit selling price of $190. If Blissful Breeze produces 900 fans and sells 842 fans this month, the total cost of goods sold will be $_______.

Unit Product Cost * Units Sold $94,304

Absorption Costing Period Costs

Variable S&A Expenses Fixed S&A Expenses

Blissful Breeze manufactures and sells ceiling fans. Variable selling and administrative expense is $11.50 per fan and fixed selling and expense is $7,800 per month. If Blissful Breeze produces 900 fans and sells 842 fans this month, total selling and administrative expenses will be $

Variable Selling & Admin Expense * Units Sold + Fixed Selling & Admin Expense 17,483

Both GAAP and IFRS require ______ ______ for external reports

absorption costing

Selling and administrative expenses ______ .

are always treated as period costs

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

b. 11,500 10,000 + (5,000 * .30)

Contribution margin _____ .

becomes profit after fixed expenses are covered

Under absorption costing product costs consist of ______ .

both variable and fixed manufacturing costs

Process costing accumulates costs by _______ .

department

When using variable costing, fixed manufacturing overhead is ______ .

expensed in the period incurred

Under variable costing the cost of a unit of inventory does not contain _____.

fixed manufacturing overhead

Absorption costing net income is calculated by subtracting selling and administrative expenses from ____ _____ .

gross margin

Under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as _____ costs.

period

Variable costing treats fixed manufacturing overhead as a(n) ____ cost.

period

CVP analysis is based on some _____ that may be violated in practice, but the tool is still generally useful.

practices

Each department has a separate Work In Process account when using ________ costing.

process

Work is performed on products, and materials, labor, or overhead costs are added to products in an ______ department.

processing

When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units _______.

produced

A part or activity within an organization about which managers would like cost, revenue or profit data is called a(n) ______ .

segment

A company's operations can be divided by product lines, geographical area, manufacturing plants, service centers or sales territories, which are known as ____ .

segment(s)

CPV analysis allows companies to easily identify the change in profit due to changes in ____ .

selling price, costs, and volume