Unit 6: Managerial Accounting
What problem will be caused if overhead is underapplied?
Total cost of products or orders will be understated.
The head of commercial lending at Merrilton Bank is concerned about a loan the bank made to William Lee Company. For the past three quarters in a row, William Lee has been late in making its regularly scheduled loan payments. However, William Lee's CFO claims that internal forecasts indicate that William Lee's net income in the next quarter will be $100,000, which will be more than enough to make a double loan payment to Merrilton Bank, with plenty left over. The head of Merrilton's commercial lending group is a bit skeptical about William Lee's forecasted net income of $100,000. She has asked William Lee's CFO to provide some internal data so that she can assess the reasonableness of this forecast. These data are for William Lee Company. Break-even sales revenue $250,000 Fixed costs $150,000 Calculate the variable costs for William Lee Company.
$100,000 Since Jay Robert Company is at break-even sales revenue of $250,000, and fixed costs are $150,000, variable costs must be $250,000 - $100,000 = $150.000.
These data are for Ren Miller Company. Total sales revenue $250,000 Number of units sold $100,000 Variable costs $100,000 Fixed costs$50,000 Calculate the total contribution margin.
$150,000 Contribution margin = total sales revenue less variable costs = $250,000 - $100,000 = $150,000.
Quiet Flag Industries reported the following data. Price per unit = $25 Fixed cost = $6,000 Break-even number of units = 1,000 units Given these data, compute the variable cost per unit.
$19 per unit Designate VC as the variable cost per unit $6,000 fixed cost / ($25 selling price per unit - VC) = 1,000 break-even number of units VC = $25 selling price per unit - ($6,000 fixed cost / 1,000 break-even number of units) VC = $19 per unit
Endothon Company reported the following data. Price per unit = $10 Variable cost per unit = $7 Fixed cost = $1,500 Number of units sold = 1,000 units Given these data, compute contribution margin per unit.
$3
Garcia Company reported the following data. Price per unit = $10 Variable cost per unit = $7 Fixed cost = $1,500 Number of units sold = 700 units Given these data, compute the contribution margin per unit.
$3 per unit Contribution margin = price per unit of $10 less the variable cost per unit of $7 = $3 contribution margin per unit.
Kamal Company reported the following data. Price per unit = $20 Fixed cost = $6,000 Variable cost per unit = $11 Compute the contribution margin per unit for Kamal Company.
$9 Contribution margin per unit = $20 price per unit - $11 variable cost per unit = $9.
What is work-in-process inventory?
All material on the factory floor that is not yet completed
Michael Company reported the following data. Price per unit = $10 Variable cost per unit = $7 Fixed cost = $3,300 Given these data, compute the break-even number of units.
1,100 units $3,300 fixed cost / ($10 selling price per unit -$7 variable cost per unit) = 1,100 units
Sousa Company reported the following data. Price per unit = $10 Variable cost per unit = $7 Fixed cost = $1,500 Given these data, compute the break-even number of units.
500 units $1,500 fixed cost / ($10 selling price per unit -$7 variable cost per unit) = 500 units
Lucas works for a professional consulting firm. He has been asked to compare his firm's financial performance to the performance of another firm. Which company should Lucas use as a benchmark for his company's performance
A consulting firm
What is a mixed cost?
A cost that includes both a fixed portion and a variable portion
What is a stepped fixed cost?
A cost that remains constant in total within a range of activity and then changes in a large amount above a certain threshold of activity
Which statement is true with respect to fixed and variable costs?
A fixed cost is fixed in total and decreases per unit as the number of units increases.
What is an important difference in the cost accounts of a merchandising company compared to a manufacturing company?
A merchandising company has no raw materials inventory or work-in-process inventory.
What costs are included in manufacturing overhead?
All manufacturing costs that are not classified as direct materials or direct labor
Paradigm Toys is a manufacturing company that produces stuffed animals. In one step of the manufacturing process, raw materials such as fabric, thread, and polyester filling are moved from the warehouse to the production floor. What would be the effect of this event on the company's books?
An increase in work-in-process inventory
Why do companies allocate overhead costs based on estimated overhead numbers instead of actual numbers?
Because overhead costs must be allocated beginning the very first day of the period, but the actual numbers not available until the end of the period
Yoshida Company manufactures cell phones. Which item is a product cost for Yoshida Company?
Bonuses paid to the phone assemblers who work on the production line
Which types of costs does a manufacturer have?
Both product and period cost
Which types of costs does a merchandiser have?
Both product and period costs
Maria just started a cosmetics company. She purchases makeup and nail polish from a wholesale distributor and sells these products on social media. Which costs will Maria's new company have?
Both product costs and period costs
Which statement describes managerial accounting?
Compares planned and actual results
Which example correctly shows how contribution margin analysis is used by management in making business decisions?
Contribution margin analysis helps management evaluate whether to continue selling a product.
You have been hired to help Garcia Company perform certain types of cost-volume-profit analysis. You attend a meeting with the owners and founders of the company—Talia and Daniel Garcia—and their accountant. The accountant has been able to prepare the following information for this meeting: Contribution margin ratio 15% Fixed costs $100,000 Daniel asks you to help them calculate what the break-even sales revenue would be for the company for future planning purposes. Based on the above data, what is the break-even sales revenue?
Contribution margin ratio + Variable cost ratio = 100% 15% + Variable cost ratio = 100% Variable cost ratio = 85% Let X designate the break-even level of sales revenue. X - 0.85X - $100,000 = $0 0.15X = $100,000 X = $666,667
A new product line manager approaches you in order to understand how cost behavior and cost-volume-profit analysis affect the overall profitability of the product line for which the manager is currently responsible. You have been able to gather the following cost information for the product line: Average selling price per unit: $10 Fixed manufacturing costs per year: $50,000 Fixed selling and administrative costs per year: $50,000 Total variable costs per unit: $7.50 The product line manager is trying to calculate the break-even point for this product line, using the information you have provided above. What is the contribution margin ratio for this product line, based upon the above information?
Contribution margin ratio = $ contribution margin per unit / average selling price per unit $ contribution margin per unit = average selling price per unit - total variable costs per unit $ contribution margin per unit = $10 - $7.50 = $2.50 Contribution margin ratio = $2.50 / $10.00 = 25%.
Which activity involves the process of tracking the actual performance of a company?
Controlling
A successful law firm called Kim and Lee provides legal services to large corporations and employs over 100 attorneys to represent clients. The firm does not purchase products to sell to its clients but focuses solely on providing legal counsel. Which line item must be absent from the firm's income statement?
Cost of goods sold
Turay Company reported the following data. Price per unit = $20 Fixed cost = $6,000 Break-even number of units = 1,000 units Given these data, compute the variable cost per unit.
Designate VC as the variable cost per unit $6,000 fixed cost / ($20 selling price per unit - VC) = 1,000 break-even number of units VC = $20 selling price per unit - ($6,000 fixed cost / 1,000 break-even number of units) VC = $14 per unit
Which product costs are substantial in both a service company and a manufacturing company?
Direct labor and overhead
Which item is a product cost?
Direct materials
What are the three categories of manufacturing costs?
Direct materials, direct labor, and manufacturing overhead
How is the predetermined overhead rate calculated for a new product line?
Estimated overhead costs divided by estimated level of activity The predetermined overhead rate is created by dividing estimated overhead by the estimate of the expected level of activity (such as labor hours) to be used to allocate overhead during the year.
Which statement correctly distinguishes the uses of financial accounting information from the uses of managerial accounting information?
Financial accounting information is prepared according to a generally accepted set of rules.
What are differential costs?
Future costs that change as the result of a decision
Leilani and Diego are discussing different types of businesses. They agree that, in terms of cost flows, there are many similarities between a manufacturer of cars, such as General Motors, and a consulting company, such as McKinsey. However, they also agree that there is one very important difference in the costs being incurred by General Motors and McKinsey. What is the important difference in the costs of GM as compared to McKinsey?
GM likely has relatively high materials costs, whereas the materials costs for a McKinsey are relatively low.
What must be true of an indirect cost?
It is a cost that cannot be traced to a specific business unit or product.
What must be true of a direct cost?
It is a cost traceable to a specific business unit.
Which statement about managerial accounting data is true?
Managerial accounting data are created based on competitive needs that are unique to the organization.
These data are for Charlotte Martin Company. Sales revenue - $500,000 Variable costs - $420,000 Break-even number of units 100,000 Calculate the total fixed costs when Charlotte Martin sells 100,000 units.
Let X = fixed costs. Sales Revenue - Variable Costs − Fixed Costs = $0 $500,000 − $420,000 - X = $0 $500,000 − $420,000 = X $80,000 = X
Which statement accurately describes managerial and financial accounting data?
Managerial accounting data are created based on competitive needs that are unique to the organization.
Which characteristic is a unique feature of management accounting information?
Management accounting information is composed of both financial and nonfinancial data.
Which statement identifies a difference between managerial and financial accounting?
Managerial accounting has substantial competitive value, while financial accounting is not a competitive tool.
What is a characteristic of managerial accounting systems that is not also a characteristic of financial accounting systems?
Managerial accounting includes budget and forecast data.
Which group represents the primary users of managerial accounting information?
Managers
What type of cost are the wages paid to a factory supervisor?
Manufacturing overhead
Which type of business purchases finished goods for resale?
Merchandising
Which type of business is a typical retailer?
Merchandising business
What are sunk costs?
Past costs that cannot be changed by a current decision
Company managers are important users of managerial accounting information. What are the three primary functions of company managers?
Planning, controlling, and evaluating
What is the sequence of the flow of costs through a manufacturing operation?
Purchase raw materials, transfer raw materials to production, add direct labor and manufacturing overhead costs, transfer the cost of completed goods to finished goods inventory, sell goods and transfer cost to cost of goods sold.
What is an opportunity cost?
Revenue lost from selecting a different alternative
Past costs that cannot be changed are?
SUNK COSTS
How is contribution margin calculated?
Sales minus variable cost
What is the formula for the contribution margin?
Sales revenue - variable costs
Which equation is true at the break-even point?
Sales revenue - variable costs - fixed costs = $0 target income = $0.
What are the three components of product costs?
Selling, general, and administrative
Jack just started a business that develops websites for other businesses. Which type of organization is Jack's new business?
Service organization
What does long-run planning include?
Strategic planning and capital budgeting
Which statement is correct with respect to accounting for overhead?
The overhead account is a temporary holding account for overhead costs.
What is true if the quantity sold for a product line is below the break-even point?
The product line is operating at a loss.
What is the relevant range?
The range of volume over which the variable cost per unit is expected to remain the same
If overhead is underapplied during a period, which statement below is true?
The total cost of goods sold will be understated.
Which statement below is true with regard to fixed costs?
Total fixed costs do not change in total within a relevant range of activity.
Which statement is true at the break-even point?
Total revenues equal total costs.
Which statement below is true with regard to variable costs?
Total variable costs change in relationship to the volume of activity
The founders of Yvonne Company—Yvonne, Ross, and Harold—are disappointed with the financial performance of their business so far. Yes, they are making money, but the monthly profit of their business has not been enough to justify their quitting their individual jobs in which they had been highly paid. Yvonne, Ross, and Harold have determined that their business needs to generate a total contribution margin of at least $27,000 per month in order for them to continue; otherwise, they will shut down their company and go back to working their former jobs. They would like to know how many units of their product they need to sell each month to generate this $27,000 total contribution margin. Yvonne Company reported the following data. Price per unit = $20 Fixed cost per month = $6,000 Variable cost per unit = $11 How many units must Yvonne Company sell each month in order to reach a total contribution margin of $27,000?
Units required = Required total contribution margin / contribution margin per unit sold Contribution margin per unit sold = Price per unit - Variable cost per unit Units required = $27,000 / ($20 - $11) Units required = $27,000 / $9 Units required = 3,000 units
What is an example of an indirect cost in a hospital?
Utility costs for the hospital building
Williams Cable Company markets cable services to local residential homes on a direct sales basis. You are sitting in a meeting attended by representatives of the sales, marketing, and the accounting departments of the company. The sales and marketing personnel explain how many local subscribers they plan to add in the next year to the company's subscriber listing using certain types of sales and marketing approaches. Since the company has excess capacity to add more cable subscribers at the moment, when one more subscriber is added to the subscriber base, which type of costs will increase in a direct proportion to each subscriber added?
Variable
Which item is a period cost?
Wages of secretarial staff
Baby Jude Company manufactures car seats. Your colleague works in the sales and marketing department, and is trying to understand the differences between a product and a period cost for Baby Jude Company including examples for both. Which item is a period cost for Baby Jude Company?
Wages of the janitors in the executive office building
