Accounting 202 - Final Exam

COGS =

Beginning FG INV + COGM - Ending FG INV

Total Cost of Work in Process(WIP) =

Beginning WIP + Total Manufacturing Costs

COGM =

Total Cost of WIP - Ending WIP

Predetermined Overhead Rate =

Estimated Annual Overhead Costs / Expected Annual Operating Activity

High-Low Method

1) Change in Total Costs / High minus Low Activity level = Variable Cost per unit 2) Total Cost - (Variable Cost * # of units) = Total Fixed Costs

Contribution Margin per Unit (CM/unit) =

Unit Selling Price - Unit Variable Costs

Contribution Margin Ratio (CMR) =

Contribution Margin per Unit / Unit Selling Price *** At Break-Even, contribution margin = fixed costs

BEP in Units =

Fixed Costs / Contribution Margin per Unit

BEP in $ =

Fixed Costs / CMR

Net Income =

(Sales Price per Unit x # of units) - (Variable Cost per Unit x # of units) - Fixed Costs

Target Net Income =

Required Sales - Variable Costs - Fixed Costs

Contribution Margin Technique

Required Sales in Units =

(Fixed Costs + Target Net Income) / CM/unit

Contribution Margin Technique

Required Sales in $ =

(Fixed Costs + Target Net Income) / CMR

Margin of Safety in $ =

Actual (Expected) Sales - BEP in $

Margin of Safety Ratio =

Margin of Safety in $ / Actual (Expected) Sales

Sales Mix Percentage =

# of x units / total # of units produced

Weighted-Average Unit Contribution Margin =

(CM/unit x Sales Mix %) + (CM/unit x Sales Mix %)

Weighted-Average Unit Contribution Margin Ratio =

(CMR x Sales Mix %) + (CMR x Sales Mix %)

Contribution Margin per Unit of Limited Resource =

A / B where: A = CM/unit B = Machine Hours Required

Contribution Margin of Limited Resource =

A x B where: A = Contribution Margin per Unit of Limited Resource B = Machine Hours Required

Degree of Operating Leverage =

Contribution Margin / Net Income

Managerial Accounting

Provides economic and financial information for managers and other internal users

Comparison of Managerial and Financial Accounting

Financial Accounting: Primary Users of Reports: External Users Types and Frequency of Reports: Financial Statements; Quarterly and Annually Purpose of Reports: General-Purpose Contents of Reports: Pertains to business as a whole Verification Process: Audited by CPA Managerial Accounting: Primary Users of Reports: Internal users Types and Frequency of Reports: Internal Reports; As frequently as need Purpose of Reports: Specific-Purpose Contents of Reports: Pertains to subunits of business Verification Process: No independent audits

Management Functions - Planning

-Maximize short-term profit and market share -Commit to environmental protection and social programs -Add value to the business.

Management Functions - Directing

-Coordinate diverse activities and human resources -Implement planned objectives -Provide incentives to motivate employees -Hire and train employees. Produce a smooth-running operation

Management Functions - Controlling

-Keeping activities on track -Determine whether goals are met -Decide changes needed to get back on track -May use an informal or formal system of evaluations

Organization Charts

show the interrelationships of activities and the delegation of authority and responsibility within the company.

Question:
Managerial accountants have a single role within an organization, collecting and reporting costs to management.

Answer: True or False

False

Question:
Financial accounting reports are general-purpose and intended for external users.

Answer: True or False

True

Question:
Managerial accounting reports are special-purpose and issued as frequently as needed.

Answer: True of False

True

Question: Managers' activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control.

Answer: True or False

False

Question:
Managerial accounting reports must now comply with generally accepted accounting principles (GAAP).

Answer: True or False

False

Raw Materials

Basic materials and parts used in manufacturing process

Direct Materials

Raw materials that can be physically and directly associated with the finished product during the manufacturing process

Indirect Materials

Not physically part of the finished product or they are an impractical to trace to the finished product because their physical association with the finished product is too small in terms of cost. *Considered part of manufacturing overhead.

Direct Labor

Work of factory employees that can be physically and directly associated with converting raw materials into finished goods

Indirect Labor

Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced.

Manufacturing Overhead

-Costs that are indirectly associated with manufacturing the finished product -Includes all manufacturing costs except direct materials and direct labor -Also called factory overhead, indirect manufacturing costs, or burden

Product Costs

Components: Direct Materials, Direct Labor, Manufacturing Overhead - Costs that are an integral part of producing the product

Period Costs

Charged to expense as incurred; non-manufacturing costs; Includes all selling and administrative expenses

Cost of Goods Manufactured Schedule - Outline (Detailed)

Work in Process, Date Direct Materials RM Inventory, Date RM Purchases Total RM Available for Use Less: RM Inventory, Date Direct Materials Used Direct Labor Manufacturing Overhead Indirect Labor Factory Repairs Factory Utilities Factory Depreciation Factory Insurance Total Manufacturing Overhead Total Manufacturing Costs Total Cost of WIP Less: WIP, Date Cost of Goods Manufactured

Raw Materials Inventory

Shows the cost of raw materials on hand

Work in Process(WIP) Inventory

Shows the cost applicable to units that have been started into production but are only partially completed

Finished Goods Inventory

Shows the cost of completed goods on hand

Value Chain

Refers to all business processes associated with providing a product or service

Just-In-Time Inventory(JIT) Methods

Inventory system in which goods are manufactured or purchased just in time for sale

Total Quality Management(TQM)

Reduce defects in finished products, with the goal of zero defects

Theory of Contraints

A specific approach to identify and manage constraints in order to achieve company goals *Constraints limit the company's potential profitability

Enterprise Resource Planning(ERP)

Software programs designed to manage all major business processes

Activity-Based Costing(ABC)

Allocated overhead based on use of activities *Results in more accurate product costing and scrutiny of all activities in the value chain

Balance Scorecard

-Evaluates operations in an integrated fashion -Uses both financial and non-financial measures -Links performance to overall company objectives

Creating Proper Incentives

-Systems and controls sometimes create incentives for managers to take unethical actions -Controls need to be effective and realistic

Sarbanes-Oxley Act(SOX)

-Clarifies management's responsibilities -Requires certifications by CEO and CFO -Selection criteria for Board of Directors and Audit Committee -Substantially increased penalties for misconduct

Corporate Social Responsibity

- Considers a company's efforts to employ sustainable business practices with regard to its employees, society, and the environment - Is sometimes referred to as the triple bottom line because it evaluates a company's performance with regard to people, planet, and profit -Recent reports indicate that over 50% of the 500 largest U.S. companies provide sustainability reports

Process Cost System

Used when a large volume of similar products are manufactured - (cereal, refining of petroleum, production of ice cream); Costs are accumulated for a time period - (week or month); Costs are assigned to departments or processes for a specified period of time.

Job Order Cost System - Definition

-Costs are assigned to each job or batch -Important feature: Each job or batch has its own distinguishing characteristics -Objective is to compute the cost per job -Measures costs for each job completed - not for set time periods

Job Order Cost Flow

The flow of costs parallels the physical flow of the materials as they are converted into finished goods -Manufacturing costs: assigned to the Work in Process (WIP) Inventory account -Cost of completed jobs: transferred to the Finished Goods Inventory account -When units are sold, the cost: transferred to the Cost of Goods Sold account.

Factory labor Costs - Elements

-Gross earnings of factory workers -Employer payroll taxes on these earnings -Fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer

Manufacturing Overhead Costs

-Costs related to manufacturing process are accumulated in Manufacturing Overhead account -Manufacturing overhead subsequently assigned to work in process. -Examples: property taxes, depreciation, insurance, and repairs related to the manufacturing process

Assigning manufacturing costs to work in process results in the following entries:

1) Debits made to WIP Inventory 2) Credits made to: RM Inventory Factory Labor Manufacturing Overhead

Job Cost Sheet

- Used to record costs chargeable to specific jobs -Constitutes the subsidiary ledger for the work in process account -Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

Materials Requisition Slip

Written authorization for issuing raw materials -May be directly issued to use on a job - direct materials (charged to Work in Process Inventory) -May be considered indirect materials - charged to Manufacturing Overhead.

Job Order Costing - Advantages/Disadvantages

Advantages: -More precise in assignment of costs to projects than process costing -Provides more useful information for determining the profitability of particular projects and for estimating costs when preparing bids on future jobs Disadvantage: -Requires a significant amount of data entry

Partial Income Statement through Gross Profit - Outline

Sales Revenue Cost of Goods Sold FG Inventory, Date COGM Cost of Good Available for Sale Less: FG Inventory, Date Cost of Goods Sold Gross Profit

Under or Over Applied Overhead

-A DEBIT balance in manufacturing overhead means that overhead is UNDER APPLIED -A CREDIT balance in manufacturing overhead means that overhead is OVER APPLIED Manufacturin Overhead ____________________________________________________ Actual I Applied (Costs incurred) | (Costs assigned) | | |

Correcting Under or Over Applied Overhead

Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold UNDER APPLIED overhead is DEBITED to COGS OVER APPLIED overhead is CREDITED to COGS

Cost Behavior Analysis

The study of how specific costs respond to changes in the level of business activity - Changes in the level or volume of activity should be correlated with changes in costs -Activity level selected is called activity or volume index *Helps management plan operations and decide between alternative courses of action

Variable Costs

Costs that vary in total directly and proportionately with changes in activity level Example: If the activity level increases 10%, total variable costs increase 10% *Variable costs remain the same per unit at every level of activity.

Fixed Costs

Costs that remain the same in total regardless of changes in the activity level within a relevant range *Fixed cost per unit varies inversely with activity: As volume increases, unit cost declines, and vice versa

Relevant Range

-Throughout the range of possible levels of activity, a straight-line relationship usually does not exist for either variable costs or fixed costs -Relationship between variable costs and changes in activity level is often curvilinear -For fixed costs, the relationship is also nonlinear - some fixed costs will not change over the entire range of activities, while other fixed costs may change

Mixed Costs

Costs that have both a variable element and a fixed element *Change in total, but not proportionately with changes in activity level

High-Low Method - Definition

High-Low Method uses the total costs incurred at the high and the low levels of activity to classify mixed costs into fixed and variable components.

Cost-Volume-Profit(CVP) Analysis

The study of the effects of changes in costs and volume on a company's profits *Critical factor in management decisions: -Setting selling prices -Determining product mix -Maximizing use of production facilities

Cost-Volume-Profit Analysis - Assumptions

-Behavior of both costs and revenues is linear throughout the relevant range of the activity index -Costs can be classified accurately as either variable or fixed -Changes in activity are the only factors that affect costs. -All units produced are sold -When more than one type of product is sold, the sales mix will remain constant

CVP Income Statement - Definition

-A statement for internal use. Classifies costs and expenses as fixed or variable -Reports contribution margin in the body of the statement -Reports the same net income as a traditional income statement

Contribution Margin - Defintion

The amount of revenue remaining after deducting variable costs

CVP Income Statement - Outline

Sales Variable Costs Contribution Margin Fixed Costs Net Income

Break-Even Analysis

Process of finding the break-even point level of activity at which total revenues equal total costs (both fixed and variable).

Target Net Income - Defintion

Level of sales necessary to achieve a specified income

Margin of Safety - Definition

Measures the "cushion" that a particular level of sales provides

Sales Mix - Definition

The relative percentage in which a company sells its products

Cost Structure

The relative proportion of fixed versus variable costs that a company incurs

Operating Leverage

-Extent that net income reacts to a given change in sales -Higher fixed costs relative to variable costs cause a company to have higher operating leverage -When sales revenues are increasing, high operating leverage means that profits will increase rapidly -When sales revenues are declining, too much operating leverage can have devastating consequences

Degree of operating Leverage - Defintion

Provides a measure of a company's earnings volatility

Accumulating Manufacturing Costs - Journal Entries

RM Inventory xxx A/P xxx ---------------------------------------- Factory Labor xxx Factory W/P xxx Employee PT/P xxx ---------------------------------------- MOH xxx Vary(Payroll,A/D,etc.) xxx

Assigning Costs to WIP - Journal Entries

WIP(DM) xxx MOH(IM) xxx RM INV xxx ---------------------------------------- WIP(DL) xxx MOH(IL) xxx Factory labor xxx ---------------------------------------- WIP xxx MOH xxx *Based on O/H rate

Transferring into Finished Goods - Journal Entry

FG INV xxx WIP INV xxx

Sale of Product - Journal Entry

A/R or Cash xxx Sales Revenue xxx COGS xxx FG INV xxx

Which best describes costs that vary in total directly and proportionately with changes in the activity level?
mixed costs

A : mixed costs

B : semivariable costs

C : variable costs

D : fixed costs

C : variable costs

Daniel is planning to rent a car for an upcoming four-day business trip. The car rental agency charges a flat fee of $29 per day plus $0.12 per mile driven. Daniel plans to drive 140 miles on Day 1 of his trip, 15 miles on Day 2, 15 miles on Day 3, and 140 miles on Day 4. What are Daniel's total variable costs for the car rental?

A : $78.80

B : $37.20

C : $116.00

D : $153.20

B : $37.20

Peak Industries saw a 20% increase in activity levels over the fourth quarter. Which of the following changes should the firm expect to see in relation to this increase?

A : a 20% increase in fixed costs

B : a 20% increase in variable costs

C : a 20% increase in total costs

D : a 20% decrease in variable costs per unit

B : a 20% increase in variable costs

Which best describes what happens to the variable cost per unit if it is within the relevant range?

A : It remains constant at each activity level.

B : It decreases as production increases.

C : It increases as production increases.

D : It differs at each activity level.

A : It remains constant at each activity level.

The Gabbana Company's maintenance costs are a mixed cost. At the low level of activity (40 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, the variable maintenance cost per unit would be ________ and the total fixed maintenance cost would be _________.

A : $8.33; $267

B : $8.33; $500

C : $15.00; $400

D : $11.00; $220

A : $8.33; $267

In order to remain competitive, Big Bus Lines must reduce its average ticket price by 15%. However, the firm still wants to remain profitable. Which of the following options would allow Big Bus Lines to remain profitable while dropping its ticket prices?

A : decreasing its total fixed costs by at least 15%

B : decreasing its variable costs by at least 15%

C : decreasing its number of passengers by at least 15%

D : increasing its variable cost per ticket by at least 15%

B : decreasing its variable costs by at least 15%

________ is an underlying assumption of cost-volume-profit analysis.

A : All units produced are either sold or in ending inventory

B : Changes in activity and other factors affect costs

C : The behavior of both costs and revenues is curvilinear throughout the entire range of the activity index

D : All costs can be classified as either variable or fixed with reasonable accuracy

D : All costs can be classified as either variable or fixed with reasonable accuracy

If a product's variable cost per unit increases but its unit selling price remains constant, then the product's unit contribution margin

A : will decrease.

B : ratio will stay the same.

C : ratio will increase.

D : will stay the same.

A : will decrease.

Liberty Bicycles sells bikes for $340 each. The firm has variable costs per unit of $160. Given these figures, what is Liberty's contribution margin ratio?

A : 52.9%

B : 88.9%

C : 36.0%

D : 47.1%

A : 52.9%

BrewCo sells coffeemakers for $120 each. The firm currently has variable costs per unit of $65. If BrewCo is able to reduce its variable cost per unit to $58, its contribution margin ratio will

A : decrease by about 6 percent.

B : increase by about 6 percent.

C : decrease by about 8 percent.

D : increase by about 8 percent.

B : increase by about 6 percent.

If ________, then the contribution margin ratio will increase.

A : variable costs as a percentage of sales increase

B : fixed costs increase

C : variable costs as a percentage of sales decrease

D : fixed costs decrease

C : variable costs as a percentage of sales decrease

When unit selling price remains the same and ________, then the contribution margin per unit decreases.

A : variable costs per unit increase

B : fixed costs increase

C : variable cost per unit decrease

D : fixed costs decrease

A : variable costs per unit increase

Which of the following is a formula for break-even point in sales dollars?

A : fixed costs divided by contribution margin per unit

B : contribution margin ratio divided by fixed costs

C : fixed costs divided by contribution margin ratio

D : contribution margin per unit divided by fixed costs

C : fixed costs divided by contribution margin ratio

Livingston Co. has fixed costs of $60,000 and a contribution margin ratio of 30%. To break even, Livingston Co. needs ________ in dollar sales.

A : $180,000

B : $200,000

C : $60,000

D : $0

B : $200,000

Gulph Company reported the following results from the sale of 5,000 hammers in May: sales $200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000. If Gulph increases the selling price of hammers by 10% on June 1, then ________ hammers will have to be sold in June to maintain the same level of net income.

A : 4,000

B : 4,500

C : 5,000

D : 4,300

A : 4,000

Lagerfeld Company had actual sales of $800,000 when break-even sales were $600,000. The margin of safety ratio is

A : 25%

B : 33%

C : 67%

D : 75%

A : 25%

Duck Manufacturing sells rubber rain boots for $50 per pair. In 20x4, the firm had fixed costs of $312,000 and variable costs of $24 per pair, and it expects these figures to remain the same in 20x5. In 20x4, Duck's total sales were $900,000, and the company expects this amount to increase to $925,000 in 20x5. If this sales increase does indeed occur, Duck's margin of safety ratio will increase by about ________ percent.

A : 2.4

B : 1.8

C : 3.2

D : 3.4

...

Duck Manufacturing sells rubber rain boots for $50 per pair. In the coming year, the firm expects to have fixed costs of $312,000 and variable costs of $24 per pair. If Duck wants to earn net income of $364,000 in the year ahead, what are the firm's required sales in dollars?

A : $700,000

B : $1,408,000

C : $758,000

D : $1,300,000

D : $1,300,000

Which of the following is an example of a fixed cost?

A : a utility cost that varies directly with increases and decreases in production levels

B : a supervision cost that is unchanged by the number of hours worked or the amount of output produced

C : a material cost that varies inversely with increases and decreases in production levels

D : a marketing cost that is unchanged over a certain activity level but increases once that level is exceeded

B : a supervision cost that is unchanged by the number of hours worked or the amount of output produced

What would be the shortcut formula a company would use to calculate units required to meet its target net income if target net income is $115,500; the selling price of the product is $100 each: the variable cost is $35 each; and the fixed costs are $25,250 per month?

A : ($115,550 -$$25,250) / $65

B : (115,550 <b>$100) / ($25,250 </b> $35)

C : ($25,250 + $115,500) / $65

D : (($115,550 + $25,250) * 3$5 / $65

C : ($25,250 + $115,500) / $65

Amy's Bookkeeping Service desires to break even each month. Each of Amy's services is priced at $80 and her variable costs per service provided are $32. If Amy's fixed costs are $2,160, she would need sales of ________ to break even.

A : $4,500

B : $5,400

C : $3,600

D : $2,160

C : $3,600

Cole is computing variable cost per unit using the high-low method. The highest level of activity is 725 machine hours at a total cost of $1,900. The lowest level of activity is 225 machine hours at a total cost of $1,000. What is the variable cost per unit?

A : $1.75

B : $0.50

C : $2.25

D : $1.80

D : $1.80

Company Y has not changed its selling price nor its total fixed cost, but has been able to decrease its unit variable cost. What will happen to the units required to meet its target net income?

A : The units required will increase.

B : The units required will decrease.

C : This cannot be determined from the information given.

D : The units required will remain unchanged.

B : The units required will decrease.

Edward is shopping for a cellular phone plan for his family. He opts to purchase a plan that charges $55 per month for the first line and $10 per month for each additional line. All of the phones on the plan share a total of 500 minutes of talk time per month. For any talk time in excess of this amount, Edward must pay $0.12 per minute. Edward decides to add a text messaging option to his plan. For an additional $15 flat fee per month, all of the phones on the plan share 250 text messages. For any texts in excess of this amount, Edward must pay $0.10 per message. In their first month on the plan, the five phones on Edward's account have a combined total of 580 minutes of talk time and 285 text messages. Based on these figures, which of the following statements is accurate?

A : Edward's total fixed costs for the month were $70, while his total variable costs were $53.10.

B : Edward's total fixed costs for the month were $95, while his total variable costs were $28.10.

C : Edward's total fixed costs for the month were $55, while his total variable costs were $68.10.

D : Edward's total fixed costs for the month were $110, while his total variable costs were $13.10.

D : Edward's total fixed costs for the month were $110, while his total variable costs were $13.10.

Julia's Bake Shop offers cake decorating lessons on Saturdays. Fixed cost per month is $2,000. Variable cost per student is $17.95. Julia had four classes in November with eight students per class. What is the cost equation for Julia's shop?

A : Total cost = $32 + (2,000 x number of students per month).

B : Total cost = $17.95 + (2,000 x number of classes per month).

C : Total cost = $2,000 + ($17.95 x number of students per month).

D : Total cost = $2,000 + ($17.95 x number of classes per month).

C : Total cost = $2,000 + ($17.95 x number of students per month).

BabyMart, Inc. manufactures baby cribs and currently has fixed costs of $50,000 and a sales price per unit of $315. BabyMart is expecting the variable costs of its baby cribs to increase from $90 to $115 due to an increase in prices by one of the company's major raw materials suppliers. BabyMart plans to cut fixed costs by $5,000 but is going to hold the line on the selling price of its cribs. BabyMart currently has monthly net income of $40,000 on sales of 400 cribs. To maintain the same level of income, BabyMart will need to sell an additional ________ units per month.

A : 25

B : 10

C : 15

D : 35

A : 25 *Required Sales in Units

Dana's company sells three handcrafted china products: bowls, plates, and cups. The bowls bring in $125,000 in sales, with variable costs of $58,000. The fixed costs for the company amount to $30,000. What is the contribution margin for the bowls?

A : $67,000

B : $37,000

C : $95,000

D : $97,000

A : $67,000 *Sales - Variable Costs

Ryan's store sold 48 computers for $4,500 apiece this month. The variable costs for the computers were $80,000, and the fixed costs were $58,000. What is Ryan's net income for the computers?

A : $158,000

B : $17,500

C : $78,000

D : $136,000

C : $78,000 (UnitsSale price) - variable costs - fixed costs

What is the difference between computing the break-even point in units and computing the break-even point in dollars?

A : To find the break-even point in units you must use the variable costs, whereas to find the break-even point in dollars you must use the fixed costs.

B : To find the break-even point in units you must use the unit contribution margin, whereas to find the break-even point in dollars you must use the contribution margin ratio.

C : To find the break-even point in dollars you must use the unit contribution margin, whereas to find the break-even point in units you must use the contribution margin ratio.

D : To find the break-even point in dollars you must use the variable costs, whereas to find the break-even point in units you must use the fixed costs.

B : To find the break-even point in units you must use the unit contribution margin, whereas to find the break-even point in dollars you must use the contribution margin ratio.

What needs to be determined to compute break-even sales for a mix of two or more products?

A : cost of goods sold less the variable costs

B : sales revenue of the two products divided by the number of products sold

C : weighted average unit contribution margin of all the products

D : weighted average unit gross profit margin of all the products

C : weighted average unit contribution margin of all the products

Net income will be greater at any level of units sold, if

A : more low contribution margin units are sold than high contribution margin units.

B : fixed costs equal the dollar amount of sales.

C : more high contribution margin units are sold than low contribution margin units.

D : variable costs equal fixed costs.

C : more high contribution margin units are sold than low contribution margin units.

How is the contribution margin per unit of limited resource calculated?

A : Limited resource units to produce one unit ÷ Sales price per unit

B : Unit contribution margin ÷ Limited resource units required to produce one unit

C : Sales price per unit ÷ Limited resource units required to produce one unit

D : Limited resource units required to produce one unit ÷ Unit contribution margin

B : Unit contribution margin ÷ Limited resource units required to produce one unit

Monica has found that her contribution margin per hour of time for her highest selling product is $2,500. She wants to dedicate an extra 40 hours a month to this product, but she needs to know the increase in total contribution margin if she does this. The product generally sells for $100 a unit. What would be the increase in total contribution margin for this product?

A : $62,500

B : $160,000

C : $100,000

D : $78,300

C : $100,000 * Contribution Margin x Hours

Mona sells two products at her store that both take the same amount of time to produce. Product Y has a high contribution margin and high turnover rate. Product Z has a low contribution margin and a high turnover rate. Which product should Mona dedicate the most resources to?

A : product Z, because it will produce the greatest decrease in her variable expenses

B : product Z, because it will yield the greatest increase in net income

C : product Y, because it will produce the greatest decrease in her variable expenses

D : product Y, because it will yield the greatest increase in net income

D : product Y, because it will yield the greatest increase in net income

Dave operates his business out of a small storefront, so he does not have a lot of shelf space for his products. Recently, a section of shelf space became available because a product was discontinued. Dave is trying to decide which of his products to put in that space. Product 1 has a contribution margin per unit of space of $2,000 and is very large in size. Product 2 has a contribution margin per unit of space of $1,200 and is very small in size. Based on this information alone, what product would be best for the open space?

A : product 2 because the lower contribution margin per unit of space and smaller size will result in more profit

B : product 2 because it is smaller than Product 1, so more can fit in the space

C : product 1 because it is larger in size and will be easier to see

D : product 1 because it has a higher contribution margin per unit of space

D : product 1 because it has a higher contribution margin per unit of space

Paul's company has recently made some changes that have impacted many of the amounts on his income statement. For example, the company's contribution margin is now $450,000, whereas it used to be $200,000. The net income for the company, however, has stayed the same at $110,000. What is the new degree of operating leverage for Paul's company?

A : 2.27

B : 2.48

C : 4.09

D : 1.82

C : 4.09 *Contribution Margin / Net Income

Caleb has made some changes to his variable and fixed costs over the past few months. He now wants to know how these changes impact his overall risk. Caleb's company currently has sales of $650,000. Their break-even point has been calculated as $400,000, and the fixed costs for the company are $90,000. What is the margin of safety ratio for Caleb's company?

A : .38

B : .52

C : .25

D : .62

A : .38 *(Actual Sales - Break-Even Sales) / Actual Sales

Danny owns two companies where he has recently made changes. The margin of safety ratio for Company X is 42% and the margin of safety ratio for Company Y is 25%. What does this imply about the two companies?

A : Company Y could lose more business before experiencing financial difficulties when compared to Company X.

B : Company X has larger fixed costs, while Company Y has larger variable costs.

C : Company X could lose more business before experiencing financial difficulties when compared to Company Y.

D : Company Y has larger sales, while Company X has larger fixed costs.

C : Company X could lose more business before experiencing financial difficulties when compared to Company Y.

What is the difference between the margin of safety ratio and the degree of operating leverage?

A : The degree of operating leverage is dependent upon break-even sales amounts, while the margin of safety ratio is dependent upon the contribution margin of the company.

B : The margin of safety ratio is concerned with how far sales could drop before the company begins operating at a loss, while the degree of operating leverage is computed to determine how the net income is impacted by sales.

C : The margin of safety ratio is dependent upon the net income of the company, while the degree of operating leverage is dependent upon the actual sales of the company.

D : The degree of operating leverage is concerned with how far sales could drop before the company begins operating at a loss, while the margin of safety ratio is computed to determine how the net income is impacted by sales.

B : The margin of safety ratio is concerned with how far sales could drop before the company begins operating at a loss, while the degree of operating leverage is computed to determine how the net income is impacted by sales.

Bella sells vacuums and shampooers. The vacuums each sell for $60 with variable costs of $20, and the shampooers each sell for $100 with variable costs of $60. The fixed costs for the store are $80,000. The shampooers make up 1,200 of the units sold, while the vacuums make up the other 2,800 of the units sold. What is Bella's break-even point in units?

A : 4,000 units

B : 600 units

C : 2,000 units

D : 1,400 units

C : 2,000 units

Industrial Chemicals Corporation has sales revenue of $2.45 million, variable expenses of $284,000, and fixed expenses of $356,000. If the company's sales volume increases by 15%, how will this change its operating income?

A : Operating income will increase by $460,600.

B : Operating income will increase by $481,915.

C : Operating income will increase by $271,500.

D : Operating income will increase by $324,895.

D : Operating income will increase by $324,895. *The firm's current contribution margin can be found by subtracting its variable expenses ($284,000) from its sales revenue ($2.45 million), which yields a result of $2.166 million. Subtracting the firm's fixed expenses ($356,000) from this amount produces a result of $1.81 million. Therefore, the company's operating leverage is equal to $2.166 million divided by $1.81 million, or 1.1967. Multiplying the operating leverage (1.1967) by the increase in sales (15%) reveals the firm's operating income will increase by 17.95%, or $324,895.

Rory's company sells laptop computers for $700 and high-end desktop computers for $1,800. The variable costs for the laptops total $300, while the variable costs for the desktops total $700. Rory has recently found out that the sales mix percentage for the desktops is 30%, and the laptops make up the other 70%. What is the weighted-average unit contribution margin for these two products?

A : $1,050

B : $1,030

C : $420

D : $610

D : $610

Advance Inc. manufactures beach umbrellas and reclining beach chairs. Due to unseasonably warm weather, Advance received a large order for 400 umbrellas and 2,200 chairs. Each umbrella sells for $48, and each chair sells for $60. The umbrellas take 1 machine hour to manufacture, and the chairs take 1.5 hours. The variable cost per umbrella is $18, and the variable cost per chair is $24. Advance has 1,225 machine hours available this month. How many of each product should the company make this month to maximize contribution margin?

A : 817 chairs and no umbrellas

B : 400 umbrellas and 550 chairs

C : 100 umbrellas and 408 chairs

D : 45 umbrellas and no chairs

B : 400 umbrellas and 550 chairs *Contribution margin for umbrellas = $48 - $18 = $30 . Contribution margin for chairs = $60 - $24 = $36. Contribution margin per machine hour for umbrellas = $30 ÷ 1 = $30. Contribution margin per machine hour for chairs = $36 ÷ 1.5 = $24. Because they have the larger contribution margin per machine hour, make 400 umbrellas first: 400 x 1 = 400 machine hours. Use remaining labor hours to make chairs: 1,225 - 400 = 825 ÷ 1.5 = 550 chairs

You are considering an investment in either Fremont Company or Carter, Inc. Both operate in the same industry, and this industry is expected to experience a significant uptick in sales in the coming year. Fremont's sales, variable costs, and fixed costs are $2,000,000, $1,400,000, and $200,000, respectively. Carter's sales, variable costs, and fixed costs are $2,000,000, $800,000, and $800,000, respectively. Which company is the most advantageous investment, and why?

A : Carter, Inc. is the most advantageous investment because its margin of safety ratio is lower meaning that it will have to aggressively seek market share so it doesn't experience a net loss.

B : Fremont Company is the most advantageous investment because it has the higher degree of operating leverage meaning that for each additional dollar of sales, its income will go up more than Carter's.

C : Fremont Company is the most advantageous investment because its margin of safety ratio is higher meaning that it will be able to withstand a large decrease in sales before experiencing a net loss.

D : Carter, Inc. is the most advantageous investment because it has the higher degree of operating leverage meaning that for each additional dollar of sales, its income will go up more than Fremont's.

D : Carter, Inc. is the most advantageous investment because it has the higher degree of operating leverage meaning that for each additional dollar of sales, its income will go up more than Fremont's.

Sue runs a flower and custom glass vase shop. The flowers bring in $60,000 in sales, and the vases bring in $90,000 in sales. The vase division has $45,000 in variable costs, whereas the flower division only has $24,000. What is the weighted-average contribution margin ratio for Sue's business?

A : 40%

B : 55%

C : 50%

D : 54%

D : 54%

Industry analysts have predicted a sharp decline in housing demand in the months ahead. After learning of this prediction, Nest Home Builders opts to convert as many of its variable costs to fixed costs as possible. This decision

A : is a wise one, because it will decrease the firm's degree of operating leverage and thus reduce the firm's degree of risk.

B : is a wise one, because it will increase the firm's degree of operating leverage and thus reduce the firm's degree of risk.

C : is a poor one, because it will increase the firm's degree of operating leverage and thus elevate the firm's degree of risk.

D : is a poor one, because it will decrease the firm's degree of operating leverage and thus elevate the firm's degree of risk.

C : is a poor one, because it will increase the firm's degree of operating leverage and thus elevate the firm's degree of risk.

Activity-Based Costing: Four Steps

1) Identify and classify activites and assign to cost pools 2) Identify Cost driver 3) Compute over head rate 4) Allocate costs to products

Activity-Based Overhead Rate: Equation

Estimated overhead per activity / Expected use of cost drivers per activity

3 Primary Benefits of Activity-Based Costing

1) More cost pools, therefore more accurate product costing. 2) Enhanced control over overhead costs. 3) Better management decisions.

Classifications of Activity Levels

1) Unit - Performed for each unit of production. Example: Assembly of cell phones 2) Batch - Performed every time a company produces another batch of a product. Example: Batch of ice cream 3) Product - Performed every time a company produces a new type of product. Example: Time spent testing a new drug by a pharmaceutical company 4) Facility - Required to support or sustain an entire production process. Example: A hospital

Advantages of Multiple Cost Pools

1) Used instead of one plant-wide pool and a single cost driver. 2) Numerous activity cost pools with more relevant cost drivers. 3) Costs allocated on basis of cost drivers used to produce each product.

Advantages of Enhanced Cost Control

1) Value-Added Activities: Increase the perceived value of a product or service to customers 2) Non-Value-Added Activities: Adds cost to, or increases the time spent on, a product/service without increasing its perceived value

Advantages of Better Management Decisions

Managers use ABC via ABM 1) for both strategic and operational decisions or perspectives. 2) to help managers evaluate employees, departments, and business units. 3) to establish performance standards, as well as benchmark against other companies.

Activity-based management (ABM) - Definition

A management tool that focuses on reducing costs and improving processes and decision-making.

Limitations and Knowing When to Use Activity-Based Costing

Limitations: 1) Expensive to use. 2) Arbitrary allocations remain. When to Use: 1) Product lines differ in volume and manufacturing complexity. 2) Product lines are numerous and diverse. 3) Overhead costs constitute a significant portion of total costs. 4) Manufacturing process or the number of products has changed significantly. 5) Production or marketing managers are ignoring data.

Budget - Definition

A formal written statement of management's plans for a specified future time period, expressed in financial terms. - Primary method of communicating agreed-upon objectives throughout the organization. - Promotes efficiency. - Control device - important basis for performance evaluation once adopted.

Primary Benefits of Budegting

1) Requires all levels of management to plan ahead. 2) Provides definite objectives for evaluating performance. 3) Creates an early warning system for potential problems. 4) Facilitates coordination of activities within the business. 5) Results in greater management awareness of the entity's overall operations. 6) It motivates personnel throughout organization to meet planned objectives.

Factors Considered in Sales Forcasting

1) General economic conditions 2) Industry trends 3) Market research studies 4) Anticipated advertising and promotion 5) Previous market share 6) Price changes 7) Technological developments

Participative Budgeting

Each level of management should be invited to participate. Advantages: 1) More accurate budget estimates because lower level managers have more detailed knowledge of their area. 2) Tendency to perceive process as fair due to involvement of lower level management. Overall goal - produce budget considered fair and achievable by managers while still meeting corporate goals. Disadvantages: 1) Can be time consuming and costly. 2) Can foster budgetary "gaming" through budgetary slack

3 Differences Between Budgeting and Long-Term Planning

1) Time period involved 2) Emphasis 3) Detail presented

Types of Operating Budgets (7)

1) Sales Budget 2) Production Budget 3) Direct Materials Budget 4) Direct Labor Budget 5) Manufacturing Overhead Budget 6) Selling and Administrative Expense Budget 7) Budgeted Income Statement

Types of Financial Budgets (3)

1) Capital Expenditure Budget 2) Cash Budget 3) Budgeted Balance Sheet

Sales Forecast - Definition

Shows potential sales for the industry and a company's expected share of such sales.

Master Budget - Definition

A set of interrelated budgets that constitutes a plan of action for a specified time period.

Long-Range Planning - Defintion

Identifies long-term goals, selects strategies to achieve these goals, and develops policies and plans to implement the strategies.

Sales Budget

- First budget prepared. - Derived from the sales forecast. - Every other budget depends on the sales budget. - Prepared by multiplying expected unit sales volume for each product times anticipated unit selling price.

Production Budget

- Shows units that must be produced to meet anticipated sales. - Derived from sales budget plus the desired change in ending finished goods inventory. - Essential to have a realistic estimate of ending inventory.

Required Production Units - Equation

Budgeted Sales Units + Desired Ending FG Units - Beginning FG Units

Required Direct Materials Units to Be Purchased - Equation

Direct Materials Units Required for Production + Desired Ending Direct Materials Units - Beginning Direct Materials Units

Sales Budget - Outline (3)

Expected Unit Sales Unit Selling Price Total Sales

Production Budget - Outline (5)

Expected Unit Sales Add: Desired Ending FG Units Total Required Units Less: Beginning FG Units Required Production Units

Direct Materials Budget - Outline (9)

Units to be Produced Direct Materials per Unit Total Pounds Needed for Production Add: Desired Ending Direct Materials Total Materials Required Less: Beginning Direct Materials Direct Material Purchases Cost per Pound Total Cost of Direct Materials Purchases

Direct Labor Budget - Definition

- Shows both the quantity of hours and cost of direct labor necessary to meet production requirements. - Critical in maintaining a labor force that can meet expected production.

Total Direct Labor Cost - Equation

Units to be Produced xDirect labor Time per Unit x Direct Labor Cost per Hour

Direct Labor Budget - Outline

Units to be Produced Direct Labor Time per Unit Total Required Direct Labor Hours Direct Labor Cost per Hour Total Direct Labor Cost

Manufacturing Overhead Budget - Definition

- Shows the expected manufacturing overhead costs for the budget period. - Distinguishes between fixed and variable overhead costs.

Manufacturing Overhead Budget - Outline

Variable Costs* Indirect Materials Indirect Labor Utilities Total Variable Costs Fixed Costs Supervision Salaries Depreciation Property Taxes and Insurance Maintenance Total Fixed Costs Total Manufacturing Overhead Direct Labor Hours Manufacturing Overhead Rate per Direct Labor hour

Selling and Administrative Expense Budget - Definition

- Projection of anticipated operating expenses. - Distinguishes between fixed and variable costs.

Selling and Administrative Expense Budget - Outline

Budgeted Sales in Units Variable Expenses Sales Commissions Freight-Out Total Variable Expenses Fixed Expenses Advertising Sales Salaries Office Salaries Depreciation Property Taxes and Insurance Total Fixed Expenses Total Selling and Administrative Expenses

Budgeted Income Statement - Definition

- Important end-product of the operating budgets. - Indicates expected profitability of operations. - Provides a basis for evaluating company performance. - Prepared from the operating budgets

Budgeted Income Statement - Outline

Sales Cost of Goods Sold Gross Profit Selling and Administrative Expenses Income from Operations Interest Expense Income Before Income Taxes Income Tax Expense Net Income

Cash Budget - Definition

- Shows anticipated cash flows. - Often considered to be the most important output in preparing financial budgets. - Contains three sections: - Cash Receipts - Cash Disbursements - Financing -Shows beginning and ending cash balances.

Cash Budget - Outline

Beginning Cash Balance Add: Cash Receipts Total Available Cash Less: Cash Disbursements Excess (Deficiency) of Available Cash Over Cash Disbursements Financing Ending Cash Balance

Budgetary Control - Definiton

The use of budgets in controlling operations - Takes place by means of budget reports which compare actual results with planned objectives. - Provides management with feedback on operations. - Budget reports can be prepared as frequently as needed. - Management analyzes differences between actual and planned results and determines causes.

Budgetary Control works best when a company has a formalized reporting system which:

1) Identifies the name of the budget report. 2) States the frequency of the report. 3) Specifies the purpose of the report. 4) Indicates the primary recipient(s) of the report.

Static Budget - Defintion

A projection of budget data at one level of activity. - When used in budgetary control, each budget included in the master budget is considered to be static. - Ignores data for different levels of activity. - Compares actual results with budget data at the activity level used in the master budget.

Static Budget - Uses and Limitations

- Appropriate for evaluating a manager's effectiveness in controlling costs when: - Actual level of activity closely approximates master budget activity level, and/or - Behavior of costs is fixed in response to changes in activity. - Appropriate for fixed costs. - Not appropriate for variable costs.

Flexible Budget - Defintion

Projects budget data for various levels of activity - Essentially a series of static budgets at different activity levels. - Budgetary process more useful if it is adaptable to changes in operating conditions. - Can be prepared for each type of budget in the master budget.

Steps to Develop Flexible Budget

1) Identify the activity index and the relevant range of activity. 2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. 3) Identify the fixed costs and determine the budgeted amount for each cost. 4) Prepare the budget for selected increments of activity within the relevant range.

Responsibility Center - Definition

Any individual who has control and is accountable for activities.

Decentralized Company - Definition

Control of operations delegated to many managers throughout the organization.

Segment

Area of responsibility for which reports are prepared.

Controllable Cost - Definition

A cost over which a manager has control

Uncontrollable Cost - Definition

Costs incurred indirectly and allocated to a responsibility level

Management by Exception - Defintion

Top management's review of a budget report is focused primarily on differences between actual results and planned objectives.

Materiality - Defintion

Without quantitative guidelines, management would have to investigate every budget difference regardless of the amount.

Controllability of the Item - Definition

Exception guidelines are more restrictive for controllable items than for items the manager cannot control.

Behavioral Principles (5)

1) Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibility. 2) The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated. 3) Top management should support the evaluation process. 4) The evaluation process must allow managers to respond to their evaluations. 5) The evaluation should identify both good and poor performance.

Reporting Principles (5)

1) Contain only data controllable by manager of responsibility center. 2) Provide accurate and reliable budget data to measure performance. 3) Highlight significant differences between actual results and budget goals. 4) Be tailor-made for intended evaluation. 5) Be prepared at reasonable intervals.

Types of Responsibility Centers (3)

1)Cost center - Incurs costs but does not directly generate revenues. - Managers have authority to incur costs. - Managers evaluated on ability to control costs. - Usually a production department or a service department. 2) Profit center - Incurs costs and generates revenues. - Managers judged on profitability of center. - Examples include individual departments of a retail store or branch bank offices. 3) Investment center - Incurs costs, generates revenues, and has investment funds available for use. - Manager evaluated on profitability of the center and rate of return earned on funds. - Often a subsidiary company or a product line. - Manager able to control or significantly influence investment decisions such as plant expansion.

Controllable Margin - Definition

excess of contribution margin over controllable fixed costs.

Return on investment (ROI) - Defintion

The primary basis for evaluating the performance of a manager of an investment center. - Shows the effectiveness of the manager in using the assets at his/her disposal. - Factors in ROI formula are controllable by manager.

Return on Investment (ROI) - Equation

Controllable Margin / Average Operating Assets

How do you improve ROI?

Improve ROI by increasing controllable margin, and/or reducing average operating assets.

Of the following, which is not part of a formalized reporting system?

A : State the corrective action that should be taken.

B : Specify the purpose of the report.

C : Identify the name of the budget report.

D : Indicate the primary recipient(s) of the report.

A : State the corrective action that should be taken.

What are relevant costs?

Costs to produce and sell a special order that would not be incurred without the special order.

When deciding whether to retain or replace a piece of equipment, which of the following costs is irrelevant?

A : New machine costs

B : Previous repair costs

C : Future repair costs

D : Variable manufacturing costs

B : Previous repair costs

An outsourcing decision involving the components of a manufactured product is commonly called a ________________
decision.

make or buy

Evans Industries receives a special purchase offer from a customer. Evans is already operating at full capacity. In order to break even, what types of costs must the order absorb?

A: Neither additional fixed manufacturing costs nor variable manufacturing costs.

B: Both additional fixed manufacturing costs and variable manufacturing costs.

C: Additional fixed manufacturing costs only.

D: Variable manufacturing costs only.

B: Both additional fixed manufacturing costs and variable manufacturing costs.

Crow Manufacturing recently replaced an old machine with a newer, more efficient machine. If the managers performed incremental analysis when making their decision, which of the following factors were most likely included in their analysis?

1. Accumulated depreciation on old machine.
2. Annual operating cost of the new machine.
3. Net cost of the new machine.

A : 1, 2, and 3.

B : 1 and 3 only.

C : 1 and 2 only.

D : 2 and 3 only.

D : 2 and 3 only.

Which of the following is true of relevant information?

A : All variable costs are relevant.

B : A relevant cost is avoidable.

C : Cost behavior determines whether a cost is relevant.

D : All fixed costs are irrelevant.

B : A relevant cost is avoidable.

While many decisions made by management involve incremental analysis, which of the following types of decisions do not involve incremental analysis?

A : Sell products or process them further.

B : Make or buy, sell or process further, and retain or replace all involve incremental analysis.

C : Make or buy.

D : Retain or replace equipment.

B : Make or buy, sell or process further, and retain or replace all involve incremental analysis.

Which of the following is a qualitative factor that could affect a decision involving incremental analysis?

A : The opportunity to use productive capacity in some other manner.

B : Rent expense.

C : Increased direct labor costs.

D : Lost morale among employees when a line of business is eliminated.

D : Lost morale among employees when a line of business is eliminated.

Oliver Industries is evaluating the manufacturing process for one of their products. Oliver has determined that the process has yearly maintenance costs of $29,000, yearly operating costs of $22,000, and yearly revenues of $97,000. Two years ago, the firm spent $6,000 upgrading the equipment used to make this product, and it expects to spend $5,000 on additional upgrades three years from now. In this scenario, Oliver

A : does not have any sunk costs.

B : has sunk costs of $51,000.

C : has sunk costs of $6,000.

D : has sunk costs of $5,000.

has sunk costs of $6,000.

Liberty Bicycles manufactures 3,500 bicycles each month. Variable manufacturing costs are $45 per unit, while total fixed manufacturing costs are $52,500. Liberty normally sells its bicycles directly to retailers for $160 each. Liberty just received an offer from a new retailer that wants to purchase 1,200 bicycles at $150 each. In this scenario, Liberty should reject the offer

A : only if the firm does not have adequate manufacturing capacity.

B : only if the firm cannot reduce its total fixed costs by $18,000.

C : unless the retailer is willing to pay $160 per bicycle.

D : unless it can reduce its variable costs by $10 per unit.

A : only if the firm does not have adequate manufacturing capacity.

Aurora Enterprises incurs costs of $38 per unit ($27 variable and $11 fixed) to make a product that normally sells for $56. A wholesaler offers to buy 3,500 units at $36 each. This special order will result in additional shipping costs of $1.15 per unit. Assuming Aurora has adequate manufacturing capacity, it should
You got it wrong :
A : reject the offer because it will lead to a net loss of $11,025.

B : accept the offer because it will produce net income of $31,500.

C : reject the offer because it will lead to a net loss of $7,000.

D : accept the offer because it will produce net income of $27,475.

D : accept the offer because it will produce net income of $27,475. If Aurora accepts the offer, its revenue will increase by 3,500 X $36 = $126,000. Meanwhile, its manufacturing costs will increase by 3,500 x $27 = $94,500, plus it will incur new shipping costs of 3,500 X $1.15 = $4,025, for total costs of $94,500 + $4,025 = $98,525. This means the firm's net income for the order would be $126,000 - $98,525 = $27,475, so Aurora should accept the offer.

Oakleaf Manufacturing incurs costs of $75 ($67 variable and $8 fixed) to make a product that normally sells for $120. A customer offers to buy 4,200 units at $70 each. Assuming Oakleaf has adequate manufacturing capacity, it should

A : reject the offer because it will result in a net loss of $12,600.

B : accept the offer because it will produce net income of $12,600.

C : reject the offer because it will result in a net loss of $21,000.

D : accept the offer because it will produce net income of $21,000.

B : accept the offer because it will produce net income of $12,600. If Oakleaf accepts the offer, its revenue will increase by 4,200 X $70 = $294,000. Meanwhile, its manufacturing costs will increase by 4,200 X $67 = $281,400. This means the firm's net income for the order would be $294,000 - $281,400 = $12,600.

Franklin Company produces 40,000 printers per month, which is 80% of plant capacity. Variable manufacturing costs are $80 per unit, and fixed manufacturing costs are $1,200,000, or $30 per unit. The printers are normally sold directly to retailers at $150 each. Franklin has an offer from a foreign wholesaler to purchase an additional 4,000 printers at $100 per unit. Acceptance of the offer would not affect normal sales of the product, and the additional units can be manufactured without increasing plant capacity. What is the amount of increase (decrease) to net income if Franklin accepts the order?

A : $80,000

B : ($200,000)

C : $40,000

D : ($ 40,000)

A : $80,000 The amount of increase would be $80,000 . The fixed manufacturing costs would not be included in the decision because there is no increase in plant activity by taking the order.

Precision Paper Products produces both paper towels and paper napkins. The production process begins with the receipt and pulping of raw timber. Once the timber is pulped, it is screened, rolled, and dried into large rolls of paper. At this point, half the paper is cut and folded into napkins, while the other half is cut, perforated, and rolled into towels. Based on this description, which of the costs listed below would NOT be classified as a joint cost?

A : The materials costs for the various chemicals involved in the pulping process.

B : The direct labor costs associated with operation of the screening machine.

C : The maintenance costs associated with the napkin folding machine.

D : The administrative costs associated with tracking and processing incoming timber shipments.

C : The maintenance costs associated with the napkin folding machine.

Designer Dollhouses manufactures dollhouse kits that are meant to be assembled by customers. Each kit sells for $60 and has $12 in fixed production costs and $10 in variable production costs. Rather than selling these kits, the firm is thinking about selling the dollhouses fully assembled for $95 each. The variable costs for assembling one dollhouse are expected to be $4 and the fixed costs are expected to be $10. Given these figures, which of the following statements is accurate?

A : Designer should sell dollhouse kits rather than assembled dollhouses because its net income per unit will be $14 higher.

B : Designer should sell assembled dollhouses rather than dollhouse kits because its net income per unit will be $21 higher.

C : Designer should sell dollhouse kits rather than assembled dollhouses because its net income per unit will be $8 higher.

D : Designer should sell assembled dollhouses rather than dollhouse kits because its net income per unit will be $43 higher.

B : Designer should sell assembled dollhouses rather than dollhouse kits because its net income per unit will be $21 higher. Currently, Designer spends $12 + $10 = $22 on each kit, which means each kit produces net income of $60 - $22 = $38. If Designer opts to assemble the dollhouses rather than selling the kits, its per unit cost will be ($12 + $10) + ($10 + $4) = $36, which means each dollhouse will produce net income of $95 - $36 = $59. Thus, Designer's net income per unit will be $21 higher if it opts to assemble the dollhouses prior to sale.

Each day, Tasty Tortilla Company incurs total costs of $8,000 to process flour into tortillas. The company can then sell the tortillas as is for total daily revenue of $22,500. Alternatively, Tasty can fold and fry the tortillas to make hard taco shells. The additional costs for making the taco shells are $4,200 per day, and the total daily revenues from the finished shells are $26,700. Given these figures,

A : the firm will make an additional $4,200 in income per day if it sells taco shells instead of tortillas.

B : the firm's income will remain unchanged whether it sells tortillas or taco shells.

C : the firm will make an additional $14,500 in income per day if it sells taco shells instead of tortillas.

D : the firm will make an additional $8,000 in income per day if it sells tortillas instead of taco shells.

B : the firm's income will remain unchanged whether it sells tortillas or taco shells. Here, the $8,000 is a sunk cost, so it does not figure into our calculations. We know that total daily revenue from the tortillas is $22,500, while that for the shells is $26,700. This indicates that daily revenues would be $4,200 higher with the shells. However, with the shells, daily costs would also be $4,200 higher, so the firm will neither benefit nor suffer from selling shells instead of tortillas. Either way, the firm brings in the same daily income

Phaeton Inc. is trying to decide whether it should replace a five-year-old piece of manufacturing equipment with a new machine. When conducting the incremental analysis related to this decision, Phaeton should consider all of the following amounts except:

A : the cost of the new machine.

B : any amount received from the sale of the old machine.

C : the book value of the old equipment.

D : the variable manufacturing costs associated with the old machine.

C : the book value of the old equipment.

Five years ago, Miller Manufacturing spent $150,000 on a new piece of industrial machinery. Six months ago, the firm spent $32,000 on upgrades to the machinery. Currently, Miller is considering whether to replace the existing machine with newer machinery with a purchase price of $180,000. When conducting the incremental analysis related to this decision, Miller should consider all of the following factors except

A: the cost of the upgrades to the old machinery.

B : any differences in the variable costs associated with each piece of machinery.

C : any salvage value associated with the old machinery.

D : any salvage value associated with the new machinery

A: the cost of the upgrades to the old machinery.

Widgets Inc. is thinking about replacing a piece of manufacturing equipment with a remaining useful life of three years. The book value of the equipment is $25,000, and the machine could be sold in its current condition for $7,000. The new machine would cost $83,000 and would have no salvage value at the end of its three-year useful life. With the new machine, Widgets' variable manufacturing costs would drop from $189,500 to $169,900 per year. If Widgets opts to buy the new machine,

A : it will see a $24,200 decrease in income over the next three years.

B : it will see a $58,800 increase in income over the next three years.

C : its total variable manufacturing costs over the next three years will be $58,800 lower than with the current machine.

D : it will be recording a loss of $25,000 on the current machine.

C : its total variable manufacturing costs over the next three years will be $58,800 lower than with the current machine. With the old machine, Widgets' variable costs over the next three years would be $189,500 X 3 = $568,500, while with the new machine, they would be $169,900 X 3 = $509,700. This is a savings of $58,800.

Sprockets Corporation is thinking about replacing a piece of manufacturing equipment with a remaining useful life of six years. The book value of the equipment is $55,000, and the machine could be sold in its current condition for $29,000. The new machine would cost $125,000 and would have a salvage value of $25,000 at the end of its six-year useful life. With the new machine, Sprocket's annual variable manufacturing costs would drop from $78,000 to $65,000. Given these figures, Sprockets will ________ over the next six years if it purchases the new machine.

A : decrease its net income by $47,000

B : increase its net income by $22,000

C : increase its net income by $7,000

D : decrease its net income by $18,000

C : increase its net income by $7,000 If Sprockets keeps the current machine for six years, it will have total variable costs of 6 X $78,000 = $468,000. If it buys the new machine, its total variable costs for the six-year period will be 6 X $65,000 = $390,000. However, the firm will also incur extra costs of $125,000 related to the machine, for total costs of $515,000. By purchasing the new machine, however, the firm would make $29,000 by selling the old equipment and another $25,000 by selling the new equipment for salvage at the end of the six years; this would reduce the firm's total costs of the new machine to $515,000 - ($29,000 + $25,000) = $461,000. Thus, the firm would increase its net income by $468,000 - $461,000 = $7,000 by purchasing the new machine.

What happens if an unprofitable segment is eliminated?

A : fixed expenses allocated to the eliminated segment will be eliminated.

B : it is impossible for net income to increase.

C : variable expenses of the eliminated segment will be eliminated.

D : it is impossible for net income to decrease.

C : variable expenses of the eliminated segment will be eliminated.

Giant Inc. is thinking about eliminating one of its unprofitable product lines. When conducting incremental analysis related to this decision, Giant should ________ costs associated with the discontinued product line will remain.

A : determine what percentage of fixed

B : assume all fixed

C : assume all variable

D : determine what percentage of variable

A : determine what percentage of fixed

A firm has just saved $36,000 in fixed costs by eliminating one of its unprofitable product lines. By dropping the product line, the firm has also seen its total company-wide contribution margin drop by $50,000. These figures indicate that the firm has seen its net income ________ due to the product discontinuation.

A : drop by $86,000

B : drop by $14,000

C : increase by $14,000

D : increase by $86,000

B : drop by $14,000 The firm saves $36,000 by eliminating the product, but it also experiences a $50,000 drop in contribution margin. Because $36,000 - $50,000 = -$14,000, the net result is a $14,000 decrease in net income.

When deciding whether to retain or replace a piece of equipment, which of the following costs is irrelevant?

A : New machine costs

B : Previous repair costs

C : Future repair costs

D : Variable manufacturing costs

B : Previous repair costs

Each day, a firm manufactures 10,000 units of Product A. The firm can then either sell Product A as is or process it into Product B. Which of the following events would most likely cause the firm to reevaluate its decision of which product to sell?

A : A change in the firm's joint materials costs.

B : A change in the relative level of consumer demand for each product.

C : A change in the firm's joint manufacturing costs.

D : A change in the labor costs common to both products.

B : A change in the relative level of consumer demand for each product.

When will a special order need to absorb additional fixed manufacturing costs?

1. When the price offered is more than 20% below the normal sales price.
2. When the company is operating at full capacity.

A : 1 only.

B : Neither 1 nor 2.

C : Both 1 and 2.

D : 2 only.

D : 2 only.

Evans Industries receives a special purchase offer from a customer. Evans is already operating at full capacity. In order to break even, what types of costs must the order absorb?

A : Neither additional fixed manufacturing costs nor variable manufacturing costs.

B : Both additional fixed manufacturing costs and variable manufacturing costs.

C : Additional fixed manufacturing costs only.

D : Variable manufacturing costs only.

B : Both additional fixed manufacturing costs and variable manufacturing costs.

Crow Manufacturing recently replaced an old machine with a newer, more efficient machine. If the managers performed incremental analysis when making their decision, which of the following factors were most likely included in their analysis?

1. Accumulated depreciation on old machine.
2. Annual operating cost of the new machine.
3. Net cost of the new machine.

A : 1, 2, and 3.

B : 1 and 3 only.

C : 1 and 2 only.

D : 2 and 3 only.

D : 2 and 3 only.

Which of the following is true of relevant information?

A : All variable costs are relevant.

B : A relevant cost is avoidable.

C : Cost behavior determines whether a cost is relevant.

D : All fixed costs are irrelevant.

B : A relevant cost is avoidable.

Accounting 202 - Final Exam - Subjecto.com

Accounting 202 – Final Exam

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COGS =

Beginning FG INV + COGM – Ending FG INV

Total Cost of Work in Process(WIP) =

Beginning WIP + Total Manufacturing Costs

COGM =

Total Cost of WIP – Ending WIP

Predetermined Overhead Rate =

Estimated Annual Overhead Costs / Expected Annual Operating Activity

High-Low Method

1) Change in Total Costs / High minus Low Activity level = Variable Cost per unit 2) Total Cost – (Variable Cost * # of units) = Total Fixed Costs

Contribution Margin per Unit (CM/unit) =

Unit Selling Price – Unit Variable Costs

Contribution Margin Ratio (CMR) =

Contribution Margin per Unit / Unit Selling Price *** At Break-Even, contribution margin = fixed costs

BEP in Units =

Fixed Costs / Contribution Margin per Unit

BEP in $ =

Fixed Costs / CMR

Net Income =

(Sales Price per Unit x # of units) – (Variable Cost per Unit x # of units) – Fixed Costs

Target Net Income =

Required Sales – Variable Costs – Fixed Costs

Contribution Margin Technique

Required Sales in Units =

(Fixed Costs + Target Net Income) / CM/unit

Contribution Margin Technique

Required Sales in $ =

(Fixed Costs + Target Net Income) / CMR

Margin of Safety in $ =

Actual (Expected) Sales – BEP in $

Margin of Safety Ratio =

Margin of Safety in $ / Actual (Expected) Sales

Sales Mix Percentage =

# of x units / total # of units produced

Weighted-Average Unit Contribution Margin =

(CM/unit x Sales Mix %) + (CM/unit x Sales Mix %)

Weighted-Average Unit Contribution Margin Ratio =

(CMR x Sales Mix %) + (CMR x Sales Mix %)

Contribution Margin per Unit of Limited Resource =

A / B where: A = CM/unit B = Machine Hours Required

Contribution Margin of Limited Resource =

A x B where: A = Contribution Margin per Unit of Limited Resource B = Machine Hours Required

Degree of Operating Leverage =

Contribution Margin / Net Income

Managerial Accounting

Provides economic and financial information for managers and other internal users

Comparison of Managerial and Financial Accounting

Financial Accounting: Primary Users of Reports: External Users Types and Frequency of Reports: Financial Statements; Quarterly and Annually Purpose of Reports: General-Purpose Contents of Reports: Pertains to business as a whole Verification Process: Audited by CPA Managerial Accounting: Primary Users of Reports: Internal users Types and Frequency of Reports: Internal Reports; As frequently as need Purpose of Reports: Specific-Purpose Contents of Reports: Pertains to subunits of business Verification Process: No independent audits

Management Functions – Planning

-Maximize short-term profit and market share -Commit to environmental protection and social programs -Add value to the business.

Management Functions – Directing

-Coordinate diverse activities and human resources -Implement planned objectives -Provide incentives to motivate employees -Hire and train employees. Produce a smooth-running operation

Management Functions – Controlling

-Keeping activities on track -Determine whether goals are met -Decide changes needed to get back on track -May use an informal or formal system of evaluations

Organization Charts

show the interrelationships of activities and the delegation of authority and responsibility within the company.

Question:
Managerial accountants have a single role within an organization, collecting and reporting costs to management.

Answer: True or False

False

Question:
Financial accounting reports are general-purpose and intended for external users.

Answer: True or False

True

Question:
Managerial accounting reports are special-purpose and issued as frequently as needed.

Answer: True of False

True

Question: Managers’ activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control.

Answer: True or False

False

Question:
Managerial accounting reports must now comply with generally accepted accounting principles (GAAP).

Answer: True or False

False

Raw Materials

Basic materials and parts used in manufacturing process

Direct Materials

Raw materials that can be physically and directly associated with the finished product during the manufacturing process

Indirect Materials

Not physically part of the finished product or they are an impractical to trace to the finished product because their physical association with the finished product is too small in terms of cost. *Considered part of manufacturing overhead.

Direct Labor

Work of factory employees that can be physically and directly associated with converting raw materials into finished goods

Indirect Labor

Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced.

Manufacturing Overhead

-Costs that are indirectly associated with manufacturing the finished product -Includes all manufacturing costs except direct materials and direct labor -Also called factory overhead, indirect manufacturing costs, or burden

Product Costs

Components: Direct Materials, Direct Labor, Manufacturing Overhead – Costs that are an integral part of producing the product

Period Costs

Charged to expense as incurred; non-manufacturing costs; Includes all selling and administrative expenses

Cost of Goods Manufactured Schedule – Outline (Detailed)

Work in Process, Date Direct Materials RM Inventory, Date RM Purchases Total RM Available for Use Less: RM Inventory, Date Direct Materials Used Direct Labor Manufacturing Overhead Indirect Labor Factory Repairs Factory Utilities Factory Depreciation Factory Insurance Total Manufacturing Overhead Total Manufacturing Costs Total Cost of WIP Less: WIP, Date Cost of Goods Manufactured

Raw Materials Inventory

Shows the cost of raw materials on hand

Work in Process(WIP) Inventory

Shows the cost applicable to units that have been started into production but are only partially completed

Finished Goods Inventory

Shows the cost of completed goods on hand

Value Chain

Refers to all business processes associated with providing a product or service

Just-In-Time Inventory(JIT) Methods

Inventory system in which goods are manufactured or purchased just in time for sale

Total Quality Management(TQM)

Reduce defects in finished products, with the goal of zero defects

Theory of Contraints

A specific approach to identify and manage constraints in order to achieve company goals *Constraints limit the company’s potential profitability

Enterprise Resource Planning(ERP)

Software programs designed to manage all major business processes

Activity-Based Costing(ABC)

Allocated overhead based on use of activities *Results in more accurate product costing and scrutiny of all activities in the value chain

Balance Scorecard

-Evaluates operations in an integrated fashion -Uses both financial and non-financial measures -Links performance to overall company objectives

Creating Proper Incentives

-Systems and controls sometimes create incentives for managers to take unethical actions -Controls need to be effective and realistic

Sarbanes-Oxley Act(SOX)

-Clarifies management’s responsibilities -Requires certifications by CEO and CFO -Selection criteria for Board of Directors and Audit Committee -Substantially increased penalties for misconduct

Corporate Social Responsibity

– Considers a company’s efforts to employ sustainable business practices with regard to its employees, society, and the environment – Is sometimes referred to as the triple bottom line because it evaluates a company’s performance with regard to people, planet, and profit -Recent reports indicate that over 50% of the 500 largest U.S. companies provide sustainability reports

Process Cost System

Used when a large volume of similar products are manufactured – (cereal, refining of petroleum, production of ice cream); Costs are accumulated for a time period – (week or month); Costs are assigned to departments or processes for a specified period of time.

Job Order Cost System – Definition

-Costs are assigned to each job or batch -Important feature: Each job or batch has its own distinguishing characteristics -Objective is to compute the cost per job -Measures costs for each job completed – not for set time periods

Job Order Cost Flow

The flow of costs parallels the physical flow of the materials as they are converted into finished goods -Manufacturing costs: assigned to the Work in Process (WIP) Inventory account -Cost of completed jobs: transferred to the Finished Goods Inventory account -When units are sold, the cost: transferred to the Cost of Goods Sold account.

Factory labor Costs – Elements

-Gross earnings of factory workers -Employer payroll taxes on these earnings -Fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer

Manufacturing Overhead Costs

-Costs related to manufacturing process are accumulated in Manufacturing Overhead account -Manufacturing overhead subsequently assigned to work in process. -Examples: property taxes, depreciation, insurance, and repairs related to the manufacturing process

Assigning manufacturing costs to work in process results in the following entries:

1) Debits made to WIP Inventory 2) Credits made to: RM Inventory Factory Labor Manufacturing Overhead

Job Cost Sheet

– Used to record costs chargeable to specific jobs -Constitutes the subsidiary ledger for the work in process account -Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

Materials Requisition Slip

Written authorization for issuing raw materials -May be directly issued to use on a job – direct materials (charged to Work in Process Inventory) -May be considered indirect materials – charged to Manufacturing Overhead.

Job Order Costing – Advantages/Disadvantages

Advantages: -More precise in assignment of costs to projects than process costing -Provides more useful information for determining the profitability of particular projects and for estimating costs when preparing bids on future jobs Disadvantage: -Requires a significant amount of data entry

Partial Income Statement through Gross Profit – Outline

Sales Revenue Cost of Goods Sold FG Inventory, Date COGM Cost of Good Available for Sale Less: FG Inventory, Date Cost of Goods Sold Gross Profit

Under or Over Applied Overhead

-A DEBIT balance in manufacturing overhead means that overhead is UNDER APPLIED -A CREDIT balance in manufacturing overhead means that overhead is OVER APPLIED Manufacturin Overhead ____________________________________________________ Actual I Applied (Costs incurred) | (Costs assigned) | | |

Correcting Under or Over Applied Overhead

Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold UNDER APPLIED overhead is DEBITED to COGS OVER APPLIED overhead is CREDITED to COGS

Cost Behavior Analysis

The study of how specific costs respond to changes in the level of business activity – Changes in the level or volume of activity should be correlated with changes in costs -Activity level selected is called activity or volume index *Helps management plan operations and decide between alternative courses of action

Variable Costs

Costs that vary in total directly and proportionately with changes in activity level Example: If the activity level increases 10%, total variable costs increase 10% *Variable costs remain the same per unit at every level of activity.

Fixed Costs

Costs that remain the same in total regardless of changes in the activity level within a relevant range *Fixed cost per unit varies inversely with activity: As volume increases, unit cost declines, and vice versa

Relevant Range

-Throughout the range of possible levels of activity, a straight-line relationship usually does not exist for either variable costs or fixed costs -Relationship between variable costs and changes in activity level is often curvilinear -For fixed costs, the relationship is also nonlinear – some fixed costs will not change over the entire range of activities, while other fixed costs may change

Mixed Costs

Costs that have both a variable element and a fixed element *Change in total, but not proportionately with changes in activity level

High-Low Method – Definition

High-Low Method uses the total costs incurred at the high and the low levels of activity to classify mixed costs into fixed and variable components.

Cost-Volume-Profit(CVP) Analysis

The study of the effects of changes in costs and volume on a company’s profits *Critical factor in management decisions: -Setting selling prices -Determining product mix -Maximizing use of production facilities

Cost-Volume-Profit Analysis – Assumptions

-Behavior of both costs and revenues is linear throughout the relevant range of the activity index -Costs can be classified accurately as either variable or fixed -Changes in activity are the only factors that affect costs. -All units produced are sold -When more than one type of product is sold, the sales mix will remain constant

CVP Income Statement – Definition

-A statement for internal use. Classifies costs and expenses as fixed or variable -Reports contribution margin in the body of the statement -Reports the same net income as a traditional income statement

Contribution Margin – Defintion

The amount of revenue remaining after deducting variable costs

CVP Income Statement – Outline

Sales Variable Costs Contribution Margin Fixed Costs Net Income

Break-Even Analysis

Process of finding the break-even point level of activity at which total revenues equal total costs (both fixed and variable).

Target Net Income – Defintion

Level of sales necessary to achieve a specified income

Margin of Safety – Definition

Measures the "cushion" that a particular level of sales provides

Sales Mix – Definition

The relative percentage in which a company sells its products

Cost Structure

The relative proportion of fixed versus variable costs that a company incurs

Operating Leverage

-Extent that net income reacts to a given change in sales -Higher fixed costs relative to variable costs cause a company to have higher operating leverage -When sales revenues are increasing, high operating leverage means that profits will increase rapidly -When sales revenues are declining, too much operating leverage can have devastating consequences

Degree of operating Leverage – Defintion

Provides a measure of a company’s earnings volatility

Accumulating Manufacturing Costs – Journal Entries

RM Inventory xxx A/P xxx —————————————- Factory Labor xxx Factory W/P xxx Employee PT/P xxx —————————————- MOH xxx Vary(Payroll,A/D,etc.) xxx

Assigning Costs to WIP – Journal Entries

WIP(DM) xxx MOH(IM) xxx RM INV xxx —————————————- WIP(DL) xxx MOH(IL) xxx Factory labor xxx —————————————- WIP xxx MOH xxx *Based on O/H rate

Transferring into Finished Goods – Journal Entry

FG INV xxx WIP INV xxx

Sale of Product – Journal Entry

A/R or Cash xxx Sales Revenue xxx COGS xxx FG INV xxx

Which best describes costs that vary in total directly and proportionately with changes in the activity level?
mixed costs

A : mixed costs

B : semivariable costs

C : variable costs

D : fixed costs

C : variable costs

Daniel is planning to rent a car for an upcoming four-day business trip. The car rental agency charges a flat fee of $29 per day plus $0.12 per mile driven. Daniel plans to drive 140 miles on Day 1 of his trip, 15 miles on Day 2, 15 miles on Day 3, and 140 miles on Day 4. What are Daniel’s total variable costs for the car rental?

A : $78.80

B : $37.20

C : $116.00

D : $153.20

B : $37.20

Peak Industries saw a 20% increase in activity levels over the fourth quarter. Which of the following changes should the firm expect to see in relation to this increase?

A : a 20% increase in fixed costs

B : a 20% increase in variable costs

C : a 20% increase in total costs

D : a 20% decrease in variable costs per unit

B : a 20% increase in variable costs

Which best describes what happens to the variable cost per unit if it is within the relevant range?

A : It remains constant at each activity level.

B : It decreases as production increases.

C : It increases as production increases.

D : It differs at each activity level.

A : It remains constant at each activity level.

The Gabbana Company’s maintenance costs are a mixed cost. At the low level of activity (40 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, the variable maintenance cost per unit would be ________ and the total fixed maintenance cost would be _________.

A : $8.33; $267

B : $8.33; $500

C : $15.00; $400

D : $11.00; $220

A : $8.33; $267

In order to remain competitive, Big Bus Lines must reduce its average ticket price by 15%. However, the firm still wants to remain profitable. Which of the following options would allow Big Bus Lines to remain profitable while dropping its ticket prices?

A : decreasing its total fixed costs by at least 15%

B : decreasing its variable costs by at least 15%

C : decreasing its number of passengers by at least 15%

D : increasing its variable cost per ticket by at least 15%

B : decreasing its variable costs by at least 15%

________ is an underlying assumption of cost-volume-profit analysis.

A : All units produced are either sold or in ending inventory

B : Changes in activity and other factors affect costs

C : The behavior of both costs and revenues is curvilinear throughout the entire range of the activity index

D : All costs can be classified as either variable or fixed with reasonable accuracy

D : All costs can be classified as either variable or fixed with reasonable accuracy

If a product’s variable cost per unit increases but its unit selling price remains constant, then the product’s unit contribution margin

A : will decrease.

B : ratio will stay the same.

C : ratio will increase.

D : will stay the same.

A : will decrease.

Liberty Bicycles sells bikes for $340 each. The firm has variable costs per unit of $160. Given these figures, what is Liberty’s contribution margin ratio?

A : 52.9%

B : 88.9%

C : 36.0%

D : 47.1%

A : 52.9%

BrewCo sells coffeemakers for $120 each. The firm currently has variable costs per unit of $65. If BrewCo is able to reduce its variable cost per unit to $58, its contribution margin ratio will

A : decrease by about 6 percent.

B : increase by about 6 percent.

C : decrease by about 8 percent.

D : increase by about 8 percent.

B : increase by about 6 percent.

If ________, then the contribution margin ratio will increase.

A : variable costs as a percentage of sales increase

B : fixed costs increase

C : variable costs as a percentage of sales decrease

D : fixed costs decrease

C : variable costs as a percentage of sales decrease

When unit selling price remains the same and ________, then the contribution margin per unit decreases.

A : variable costs per unit increase

B : fixed costs increase

C : variable cost per unit decrease

D : fixed costs decrease

A : variable costs per unit increase

Which of the following is a formula for break-even point in sales dollars?

A : fixed costs divided by contribution margin per unit

B : contribution margin ratio divided by fixed costs

C : fixed costs divided by contribution margin ratio

D : contribution margin per unit divided by fixed costs

C : fixed costs divided by contribution margin ratio

Livingston Co. has fixed costs of $60,000 and a contribution margin ratio of 30%. To break even, Livingston Co. needs ________ in dollar sales.

A : $180,000

B : $200,000

C : $60,000

D : $0

B : $200,000

Gulph Company reported the following results from the sale of 5,000 hammers in May: sales $200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000. If Gulph increases the selling price of hammers by 10% on June 1, then ________ hammers will have to be sold in June to maintain the same level of net income.

A : 4,000

B : 4,500

C : 5,000

D : 4,300

A : 4,000

Lagerfeld Company had actual sales of $800,000 when break-even sales were $600,000. The margin of safety ratio is

A : 25%

B : 33%

C : 67%

D : 75%

A : 25%

Duck Manufacturing sells rubber rain boots for $50 per pair. In 20×4, the firm had fixed costs of $312,000 and variable costs of $24 per pair, and it expects these figures to remain the same in 20×5. In 20×4, Duck’s total sales were $900,000, and the company expects this amount to increase to $925,000 in 20×5. If this sales increase does indeed occur, Duck’s margin of safety ratio will increase by about ________ percent.

A : 2.4

B : 1.8

C : 3.2

D : 3.4

Duck Manufacturing sells rubber rain boots for $50 per pair. In the coming year, the firm expects to have fixed costs of $312,000 and variable costs of $24 per pair. If Duck wants to earn net income of $364,000 in the year ahead, what are the firm’s required sales in dollars?

A : $700,000

B : $1,408,000

C : $758,000

D : $1,300,000

D : $1,300,000

Which of the following is an example of a fixed cost?

A : a utility cost that varies directly with increases and decreases in production levels

B : a supervision cost that is unchanged by the number of hours worked or the amount of output produced

C : a material cost that varies inversely with increases and decreases in production levels

D : a marketing cost that is unchanged over a certain activity level but increases once that level is exceeded

B : a supervision cost that is unchanged by the number of hours worked or the amount of output produced

What would be the shortcut formula a company would use to calculate units required to meet its target net income if target net income is $115,500; the selling price of the product is $100 each: the variable cost is $35 each; and the fixed costs are $25,250 per month?

A : ($115,550 -$$25,250) / $65

B : (115,550 <b>$100) / ($25,250 </b> $35)

C : ($25,250 + $115,500) / $65

D : (($115,550 + $25,250) * 3$5 / $65

C : ($25,250 + $115,500) / $65

Amy’s Bookkeeping Service desires to break even each month. Each of Amy’s services is priced at $80 and her variable costs per service provided are $32. If Amy’s fixed costs are $2,160, she would need sales of ________ to break even.

A : $4,500

B : $5,400

C : $3,600

D : $2,160

C : $3,600

Cole is computing variable cost per unit using the high-low method. The highest level of activity is 725 machine hours at a total cost of $1,900. The lowest level of activity is 225 machine hours at a total cost of $1,000. What is the variable cost per unit?

A : $1.75

B : $0.50

C : $2.25

D : $1.80

D : $1.80

Company Y has not changed its selling price nor its total fixed cost, but has been able to decrease its unit variable cost. What will happen to the units required to meet its target net income?

A : The units required will increase.

B : The units required will decrease.

C : This cannot be determined from the information given.

D : The units required will remain unchanged.

B : The units required will decrease.

Edward is shopping for a cellular phone plan for his family. He opts to purchase a plan that charges $55 per month for the first line and $10 per month for each additional line. All of the phones on the plan share a total of 500 minutes of talk time per month. For any talk time in excess of this amount, Edward must pay $0.12 per minute. Edward decides to add a text messaging option to his plan. For an additional $15 flat fee per month, all of the phones on the plan share 250 text messages. For any texts in excess of this amount, Edward must pay $0.10 per message. In their first month on the plan, the five phones on Edward’s account have a combined total of 580 minutes of talk time and 285 text messages. Based on these figures, which of the following statements is accurate?

A : Edward’s total fixed costs for the month were $70, while his total variable costs were $53.10.

B : Edward’s total fixed costs for the month were $95, while his total variable costs were $28.10.

C : Edward’s total fixed costs for the month were $55, while his total variable costs were $68.10.

D : Edward’s total fixed costs for the month were $110, while his total variable costs were $13.10.

D : Edward’s total fixed costs for the month were $110, while his total variable costs were $13.10.

Julia’s Bake Shop offers cake decorating lessons on Saturdays. Fixed cost per month is $2,000. Variable cost per student is $17.95. Julia had four classes in November with eight students per class. What is the cost equation for Julia’s shop?

A : Total cost = $32 + (2,000 x number of students per month).

B : Total cost = $17.95 + (2,000 x number of classes per month).

C : Total cost = $2,000 + ($17.95 x number of students per month).

D : Total cost = $2,000 + ($17.95 x number of classes per month).

C : Total cost = $2,000 + ($17.95 x number of students per month).

BabyMart, Inc. manufactures baby cribs and currently has fixed costs of $50,000 and a sales price per unit of $315. BabyMart is expecting the variable costs of its baby cribs to increase from $90 to $115 due to an increase in prices by one of the company’s major raw materials suppliers. BabyMart plans to cut fixed costs by $5,000 but is going to hold the line on the selling price of its cribs. BabyMart currently has monthly net income of $40,000 on sales of 400 cribs. To maintain the same level of income, BabyMart will need to sell an additional ________ units per month.

A : 25

B : 10

C : 15

D : 35

A : 25 *Required Sales in Units

Dana’s company sells three handcrafted china products: bowls, plates, and cups. The bowls bring in $125,000 in sales, with variable costs of $58,000. The fixed costs for the company amount to $30,000. What is the contribution margin for the bowls?

A : $67,000

B : $37,000

C : $95,000

D : $97,000

A : $67,000 *Sales – Variable Costs

Ryan’s store sold 48 computers for $4,500 apiece this month. The variable costs for the computers were $80,000, and the fixed costs were $58,000. What is Ryan’s net income for the computers?

A : $158,000

B : $17,500

C : $78,000

D : $136,000

C : $78,000 (UnitsSale price) – variable costs – fixed costs

What is the difference between computing the break-even point in units and computing the break-even point in dollars?

A : To find the break-even point in units you must use the variable costs, whereas to find the break-even point in dollars you must use the fixed costs.

B : To find the break-even point in units you must use the unit contribution margin, whereas to find the break-even point in dollars you must use the contribution margin ratio.

C : To find the break-even point in dollars you must use the unit contribution margin, whereas to find the break-even point in units you must use the contribution margin ratio.

D : To find the break-even point in dollars you must use the variable costs, whereas to find the break-even point in units you must use the fixed costs.

B : To find the break-even point in units you must use the unit contribution margin, whereas to find the break-even point in dollars you must use the contribution margin ratio.

What needs to be determined to compute break-even sales for a mix of two or more products?

A : cost of goods sold less the variable costs

B : sales revenue of the two products divided by the number of products sold

C : weighted average unit contribution margin of all the products

D : weighted average unit gross profit margin of all the products

C : weighted average unit contribution margin of all the products

Net income will be greater at any level of units sold, if

A : more low contribution margin units are sold than high contribution margin units.

B : fixed costs equal the dollar amount of sales.

C : more high contribution margin units are sold than low contribution margin units.

D : variable costs equal fixed costs.

C : more high contribution margin units are sold than low contribution margin units.

How is the contribution margin per unit of limited resource calculated?

A : Limited resource units to produce one unit ÷ Sales price per unit

B : Unit contribution margin ÷ Limited resource units required to produce one unit

C : Sales price per unit ÷ Limited resource units required to produce one unit

D : Limited resource units required to produce one unit ÷ Unit contribution margin

B : Unit contribution margin ÷ Limited resource units required to produce one unit

Monica has found that her contribution margin per hour of time for her highest selling product is $2,500. She wants to dedicate an extra 40 hours a month to this product, but she needs to know the increase in total contribution margin if she does this. The product generally sells for $100 a unit. What would be the increase in total contribution margin for this product?

A : $62,500

B : $160,000

C : $100,000

D : $78,300

C : $100,000 * Contribution Margin x Hours

Mona sells two products at her store that both take the same amount of time to produce. Product Y has a high contribution margin and high turnover rate. Product Z has a low contribution margin and a high turnover rate. Which product should Mona dedicate the most resources to?

A : product Z, because it will produce the greatest decrease in her variable expenses

B : product Z, because it will yield the greatest increase in net income

C : product Y, because it will produce the greatest decrease in her variable expenses

D : product Y, because it will yield the greatest increase in net income

D : product Y, because it will yield the greatest increase in net income

Dave operates his business out of a small storefront, so he does not have a lot of shelf space for his products. Recently, a section of shelf space became available because a product was discontinued. Dave is trying to decide which of his products to put in that space. Product 1 has a contribution margin per unit of space of $2,000 and is very large in size. Product 2 has a contribution margin per unit of space of $1,200 and is very small in size. Based on this information alone, what product would be best for the open space?

A : product 2 because the lower contribution margin per unit of space and smaller size will result in more profit

B : product 2 because it is smaller than Product 1, so more can fit in the space

C : product 1 because it is larger in size and will be easier to see

D : product 1 because it has a higher contribution margin per unit of space

D : product 1 because it has a higher contribution margin per unit of space

Paul’s company has recently made some changes that have impacted many of the amounts on his income statement. For example, the company’s contribution margin is now $450,000, whereas it used to be $200,000. The net income for the company, however, has stayed the same at $110,000. What is the new degree of operating leverage for Paul’s company?

A : 2.27

B : 2.48

C : 4.09

D : 1.82

C : 4.09 *Contribution Margin / Net Income

Caleb has made some changes to his variable and fixed costs over the past few months. He now wants to know how these changes impact his overall risk. Caleb’s company currently has sales of $650,000. Their break-even point has been calculated as $400,000, and the fixed costs for the company are $90,000. What is the margin of safety ratio for Caleb’s company?

A : .38

B : .52

C : .25

D : .62

A : .38 *(Actual Sales – Break-Even Sales) / Actual Sales

Danny owns two companies where he has recently made changes. The margin of safety ratio for Company X is 42% and the margin of safety ratio for Company Y is 25%. What does this imply about the two companies?

A : Company Y could lose more business before experiencing financial difficulties when compared to Company X.

B : Company X has larger fixed costs, while Company Y has larger variable costs.

C : Company X could lose more business before experiencing financial difficulties when compared to Company Y.

D : Company Y has larger sales, while Company X has larger fixed costs.

C : Company X could lose more business before experiencing financial difficulties when compared to Company Y.

What is the difference between the margin of safety ratio and the degree of operating leverage?

A : The degree of operating leverage is dependent upon break-even sales amounts, while the margin of safety ratio is dependent upon the contribution margin of the company.

B : The margin of safety ratio is concerned with how far sales could drop before the company begins operating at a loss, while the degree of operating leverage is computed to determine how the net income is impacted by sales.

C : The margin of safety ratio is dependent upon the net income of the company, while the degree of operating leverage is dependent upon the actual sales of the company.

D : The degree of operating leverage is concerned with how far sales could drop before the company begins operating at a loss, while the margin of safety ratio is computed to determine how the net income is impacted by sales.

B : The margin of safety ratio is concerned with how far sales could drop before the company begins operating at a loss, while the degree of operating leverage is computed to determine how the net income is impacted by sales.

Bella sells vacuums and shampooers. The vacuums each sell for $60 with variable costs of $20, and the shampooers each sell for $100 with variable costs of $60. The fixed costs for the store are $80,000. The shampooers make up 1,200 of the units sold, while the vacuums make up the other 2,800 of the units sold. What is Bella’s break-even point in units?

A : 4,000 units

B : 600 units

C : 2,000 units

D : 1,400 units

C : 2,000 units

Industrial Chemicals Corporation has sales revenue of $2.45 million, variable expenses of $284,000, and fixed expenses of $356,000. If the company’s sales volume increases by 15%, how will this change its operating income?

A : Operating income will increase by $460,600.

B : Operating income will increase by $481,915.

C : Operating income will increase by $271,500.

D : Operating income will increase by $324,895.

D : Operating income will increase by $324,895. *The firm’s current contribution margin can be found by subtracting its variable expenses ($284,000) from its sales revenue ($2.45 million), which yields a result of $2.166 million. Subtracting the firm’s fixed expenses ($356,000) from this amount produces a result of $1.81 million. Therefore, the company’s operating leverage is equal to $2.166 million divided by $1.81 million, or 1.1967. Multiplying the operating leverage (1.1967) by the increase in sales (15%) reveals the firm’s operating income will increase by 17.95%, or $324,895.

Rory’s company sells laptop computers for $700 and high-end desktop computers for $1,800. The variable costs for the laptops total $300, while the variable costs for the desktops total $700. Rory has recently found out that the sales mix percentage for the desktops is 30%, and the laptops make up the other 70%. What is the weighted-average unit contribution margin for these two products?

A : $1,050

B : $1,030

C : $420

D : $610

D : $610

Advance Inc. manufactures beach umbrellas and reclining beach chairs. Due to unseasonably warm weather, Advance received a large order for 400 umbrellas and 2,200 chairs. Each umbrella sells for $48, and each chair sells for $60. The umbrellas take 1 machine hour to manufacture, and the chairs take 1.5 hours. The variable cost per umbrella is $18, and the variable cost per chair is $24. Advance has 1,225 machine hours available this month. How many of each product should the company make this month to maximize contribution margin?

A : 817 chairs and no umbrellas

B : 400 umbrellas and 550 chairs

C : 100 umbrellas and 408 chairs

D : 45 umbrellas and no chairs

B : 400 umbrellas and 550 chairs *Contribution margin for umbrellas = $48 – $18 = $30 . Contribution margin for chairs = $60 – $24 = $36. Contribution margin per machine hour for umbrellas = $30 ÷ 1 = $30. Contribution margin per machine hour for chairs = $36 ÷ 1.5 = $24. Because they have the larger contribution margin per machine hour, make 400 umbrellas first: 400 x 1 = 400 machine hours. Use remaining labor hours to make chairs: 1,225 – 400 = 825 ÷ 1.5 = 550 chairs

You are considering an investment in either Fremont Company or Carter, Inc. Both operate in the same industry, and this industry is expected to experience a significant uptick in sales in the coming year. Fremont’s sales, variable costs, and fixed costs are $2,000,000, $1,400,000, and $200,000, respectively. Carter’s sales, variable costs, and fixed costs are $2,000,000, $800,000, and $800,000, respectively. Which company is the most advantageous investment, and why?

A : Carter, Inc. is the most advantageous investment because its margin of safety ratio is lower meaning that it will have to aggressively seek market share so it doesn’t experience a net loss.

B : Fremont Company is the most advantageous investment because it has the higher degree of operating leverage meaning that for each additional dollar of sales, its income will go up more than Carter’s.

C : Fremont Company is the most advantageous investment because its margin of safety ratio is higher meaning that it will be able to withstand a large decrease in sales before experiencing a net loss.

D : Carter, Inc. is the most advantageous investment because it has the higher degree of operating leverage meaning that for each additional dollar of sales, its income will go up more than Fremont’s.

D : Carter, Inc. is the most advantageous investment because it has the higher degree of operating leverage meaning that for each additional dollar of sales, its income will go up more than Fremont’s.

Sue runs a flower and custom glass vase shop. The flowers bring in $60,000 in sales, and the vases bring in $90,000 in sales. The vase division has $45,000 in variable costs, whereas the flower division only has $24,000. What is the weighted-average contribution margin ratio for Sue’s business?

A : 40%

B : 55%

C : 50%

D : 54%

D : 54%

Industry analysts have predicted a sharp decline in housing demand in the months ahead. After learning of this prediction, Nest Home Builders opts to convert as many of its variable costs to fixed costs as possible. This decision

A : is a wise one, because it will decrease the firm’s degree of operating leverage and thus reduce the firm’s degree of risk.

B : is a wise one, because it will increase the firm’s degree of operating leverage and thus reduce the firm’s degree of risk.

C : is a poor one, because it will increase the firm’s degree of operating leverage and thus elevate the firm’s degree of risk.

D : is a poor one, because it will decrease the firm’s degree of operating leverage and thus elevate the firm’s degree of risk.

C : is a poor one, because it will increase the firm’s degree of operating leverage and thus elevate the firm’s degree of risk.

Activity-Based Costing: Four Steps

1) Identify and classify activites and assign to cost pools 2) Identify Cost driver 3) Compute over head rate 4) Allocate costs to products

Activity-Based Overhead Rate: Equation

Estimated overhead per activity / Expected use of cost drivers per activity

3 Primary Benefits of Activity-Based Costing

1) More cost pools, therefore more accurate product costing. 2) Enhanced control over overhead costs. 3) Better management decisions.

Classifications of Activity Levels

1) Unit – Performed for each unit of production. Example: Assembly of cell phones 2) Batch – Performed every time a company produces another batch of a product. Example: Batch of ice cream 3) Product – Performed every time a company produces a new type of product. Example: Time spent testing a new drug by a pharmaceutical company 4) Facility – Required to support or sustain an entire production process. Example: A hospital

Advantages of Multiple Cost Pools

1) Used instead of one plant-wide pool and a single cost driver. 2) Numerous activity cost pools with more relevant cost drivers. 3) Costs allocated on basis of cost drivers used to produce each product.

Advantages of Enhanced Cost Control

1) Value-Added Activities: Increase the perceived value of a product or service to customers 2) Non-Value-Added Activities: Adds cost to, or increases the time spent on, a product/service without increasing its perceived value

Advantages of Better Management Decisions

Managers use ABC via ABM 1) for both strategic and operational decisions or perspectives. 2) to help managers evaluate employees, departments, and business units. 3) to establish performance standards, as well as benchmark against other companies.

Activity-based management (ABM) – Definition

A management tool that focuses on reducing costs and improving processes and decision-making.

Limitations and Knowing When to Use Activity-Based Costing

Limitations: 1) Expensive to use. 2) Arbitrary allocations remain. When to Use: 1) Product lines differ in volume and manufacturing complexity. 2) Product lines are numerous and diverse. 3) Overhead costs constitute a significant portion of total costs. 4) Manufacturing process or the number of products has changed significantly. 5) Production or marketing managers are ignoring data.

Budget – Definition

A formal written statement of management’s plans for a specified future time period, expressed in financial terms. – Primary method of communicating agreed-upon objectives throughout the organization. – Promotes efficiency. – Control device – important basis for performance evaluation once adopted.

Primary Benefits of Budegting

1) Requires all levels of management to plan ahead. 2) Provides definite objectives for evaluating performance. 3) Creates an early warning system for potential problems. 4) Facilitates coordination of activities within the business. 5) Results in greater management awareness of the entity’s overall operations. 6) It motivates personnel throughout organization to meet planned objectives.

Factors Considered in Sales Forcasting

1) General economic conditions 2) Industry trends 3) Market research studies 4) Anticipated advertising and promotion 5) Previous market share 6) Price changes 7) Technological developments

Participative Budgeting

Each level of management should be invited to participate. Advantages: 1) More accurate budget estimates because lower level managers have more detailed knowledge of their area. 2) Tendency to perceive process as fair due to involvement of lower level management. Overall goal – produce budget considered fair and achievable by managers while still meeting corporate goals. Disadvantages: 1) Can be time consuming and costly. 2) Can foster budgetary "gaming" through budgetary slack

3 Differences Between Budgeting and Long-Term Planning

1) Time period involved 2) Emphasis 3) Detail presented

Types of Operating Budgets (7)

1) Sales Budget 2) Production Budget 3) Direct Materials Budget 4) Direct Labor Budget 5) Manufacturing Overhead Budget 6) Selling and Administrative Expense Budget 7) Budgeted Income Statement

Types of Financial Budgets (3)

1) Capital Expenditure Budget 2) Cash Budget 3) Budgeted Balance Sheet

Sales Forecast – Definition

Shows potential sales for the industry and a company’s expected share of such sales.

Master Budget – Definition

A set of interrelated budgets that constitutes a plan of action for a specified time period.

Long-Range Planning – Defintion

Identifies long-term goals, selects strategies to achieve these goals, and develops policies and plans to implement the strategies.

Sales Budget

– First budget prepared. – Derived from the sales forecast. – Every other budget depends on the sales budget. – Prepared by multiplying expected unit sales volume for each product times anticipated unit selling price.

Production Budget

– Shows units that must be produced to meet anticipated sales. – Derived from sales budget plus the desired change in ending finished goods inventory. – Essential to have a realistic estimate of ending inventory.

Required Production Units – Equation

Budgeted Sales Units + Desired Ending FG Units – Beginning FG Units

Required Direct Materials Units to Be Purchased – Equation

Direct Materials Units Required for Production + Desired Ending Direct Materials Units – Beginning Direct Materials Units

Sales Budget – Outline (3)

Expected Unit Sales Unit Selling Price Total Sales

Production Budget – Outline (5)

Expected Unit Sales Add: Desired Ending FG Units Total Required Units Less: Beginning FG Units Required Production Units

Direct Materials Budget – Outline (9)

Units to be Produced Direct Materials per Unit Total Pounds Needed for Production Add: Desired Ending Direct Materials Total Materials Required Less: Beginning Direct Materials Direct Material Purchases Cost per Pound Total Cost of Direct Materials Purchases

Direct Labor Budget – Definition

– Shows both the quantity of hours and cost of direct labor necessary to meet production requirements. – Critical in maintaining a labor force that can meet expected production.

Total Direct Labor Cost – Equation

Units to be Produced xDirect labor Time per Unit x Direct Labor Cost per Hour

Direct Labor Budget – Outline

Units to be Produced Direct Labor Time per Unit Total Required Direct Labor Hours Direct Labor Cost per Hour Total Direct Labor Cost

Manufacturing Overhead Budget – Definition

– Shows the expected manufacturing overhead costs for the budget period. – Distinguishes between fixed and variable overhead costs.

Manufacturing Overhead Budget – Outline

Variable Costs* Indirect Materials Indirect Labor Utilities Total Variable Costs Fixed Costs Supervision Salaries Depreciation Property Taxes and Insurance Maintenance Total Fixed Costs Total Manufacturing Overhead Direct Labor Hours Manufacturing Overhead Rate per Direct Labor hour

Selling and Administrative Expense Budget – Definition

– Projection of anticipated operating expenses. – Distinguishes between fixed and variable costs.

Selling and Administrative Expense Budget – Outline

Budgeted Sales in Units Variable Expenses Sales Commissions Freight-Out Total Variable Expenses Fixed Expenses Advertising Sales Salaries Office Salaries Depreciation Property Taxes and Insurance Total Fixed Expenses Total Selling and Administrative Expenses

Budgeted Income Statement – Definition

– Important end-product of the operating budgets. – Indicates expected profitability of operations. – Provides a basis for evaluating company performance. – Prepared from the operating budgets

Budgeted Income Statement – Outline

Sales Cost of Goods Sold Gross Profit Selling and Administrative Expenses Income from Operations Interest Expense Income Before Income Taxes Income Tax Expense Net Income

Cash Budget – Definition

– Shows anticipated cash flows. – Often considered to be the most important output in preparing financial budgets. – Contains three sections: – Cash Receipts – Cash Disbursements – Financing -Shows beginning and ending cash balances.

Cash Budget – Outline

Beginning Cash Balance Add: Cash Receipts Total Available Cash Less: Cash Disbursements Excess (Deficiency) of Available Cash Over Cash Disbursements Financing Ending Cash Balance

Budgetary Control – Definiton

The use of budgets in controlling operations – Takes place by means of budget reports which compare actual results with planned objectives. – Provides management with feedback on operations. – Budget reports can be prepared as frequently as needed. – Management analyzes differences between actual and planned results and determines causes.

Budgetary Control works best when a company has a formalized reporting system which:

1) Identifies the name of the budget report. 2) States the frequency of the report. 3) Specifies the purpose of the report. 4) Indicates the primary recipient(s) of the report.

Static Budget – Defintion

A projection of budget data at one level of activity. – When used in budgetary control, each budget included in the master budget is considered to be static. – Ignores data for different levels of activity. – Compares actual results with budget data at the activity level used in the master budget.

Static Budget – Uses and Limitations

– Appropriate for evaluating a manager’s effectiveness in controlling costs when: – Actual level of activity closely approximates master budget activity level, and/or – Behavior of costs is fixed in response to changes in activity. – Appropriate for fixed costs. – Not appropriate for variable costs.

Flexible Budget – Defintion

Projects budget data for various levels of activity – Essentially a series of static budgets at different activity levels. – Budgetary process more useful if it is adaptable to changes in operating conditions. – Can be prepared for each type of budget in the master budget.

Steps to Develop Flexible Budget

1) Identify the activity index and the relevant range of activity. 2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. 3) Identify the fixed costs and determine the budgeted amount for each cost. 4) Prepare the budget for selected increments of activity within the relevant range.

Responsibility Center – Definition

Any individual who has control and is accountable for activities.

Decentralized Company – Definition

Control of operations delegated to many managers throughout the organization.

Segment

Area of responsibility for which reports are prepared.

Controllable Cost – Definition

A cost over which a manager has control

Uncontrollable Cost – Definition

Costs incurred indirectly and allocated to a responsibility level

Management by Exception – Defintion

Top management’s review of a budget report is focused primarily on differences between actual results and planned objectives.

Materiality – Defintion

Without quantitative guidelines, management would have to investigate every budget difference regardless of the amount.

Controllability of the Item – Definition

Exception guidelines are more restrictive for controllable items than for items the manager cannot control.

Behavioral Principles (5)

1) Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibility. 2) The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated. 3) Top management should support the evaluation process. 4) The evaluation process must allow managers to respond to their evaluations. 5) The evaluation should identify both good and poor performance.

Reporting Principles (5)

1) Contain only data controllable by manager of responsibility center. 2) Provide accurate and reliable budget data to measure performance. 3) Highlight significant differences between actual results and budget goals. 4) Be tailor-made for intended evaluation. 5) Be prepared at reasonable intervals.

Types of Responsibility Centers (3)

1)Cost center – Incurs costs but does not directly generate revenues. – Managers have authority to incur costs. – Managers evaluated on ability to control costs. – Usually a production department or a service department. 2) Profit center – Incurs costs and generates revenues. – Managers judged on profitability of center. – Examples include individual departments of a retail store or branch bank offices. 3) Investment center – Incurs costs, generates revenues, and has investment funds available for use. – Manager evaluated on profitability of the center and rate of return earned on funds. – Often a subsidiary company or a product line. – Manager able to control or significantly influence investment decisions such as plant expansion.

Controllable Margin – Definition

excess of contribution margin over controllable fixed costs.

Return on investment (ROI) – Defintion

The primary basis for evaluating the performance of a manager of an investment center. – Shows the effectiveness of the manager in using the assets at his/her disposal. – Factors in ROI formula are controllable by manager.

Return on Investment (ROI) – Equation

Controllable Margin / Average Operating Assets

How do you improve ROI?

Improve ROI by increasing controllable margin, and/or reducing average operating assets.

Of the following, which is not part of a formalized reporting system?

A : State the corrective action that should be taken.

B : Specify the purpose of the report.

C : Identify the name of the budget report.

D : Indicate the primary recipient(s) of the report.

A : State the corrective action that should be taken.

What are relevant costs?

Costs to produce and sell a special order that would not be incurred without the special order.

When deciding whether to retain or replace a piece of equipment, which of the following costs is irrelevant?

A : New machine costs

B : Previous repair costs

C : Future repair costs

D : Variable manufacturing costs

B : Previous repair costs

An outsourcing decision involving the components of a manufactured product is commonly called a ________________
decision.

make or buy

Evans Industries receives a special purchase offer from a customer. Evans is already operating at full capacity. In order to break even, what types of costs must the order absorb?

A: Neither additional fixed manufacturing costs nor variable manufacturing costs.

B: Both additional fixed manufacturing costs and variable manufacturing costs.

C: Additional fixed manufacturing costs only.

D: Variable manufacturing costs only.

B: Both additional fixed manufacturing costs and variable manufacturing costs.

Crow Manufacturing recently replaced an old machine with a newer, more efficient machine. If the managers performed incremental analysis when making their decision, which of the following factors were most likely included in their analysis?

1. Accumulated depreciation on old machine.
2. Annual operating cost of the new machine.
3. Net cost of the new machine.

A : 1, 2, and 3.

B : 1 and 3 only.

C : 1 and 2 only.

D : 2 and 3 only.

D : 2 and 3 only.

Which of the following is true of relevant information?

A : All variable costs are relevant.

B : A relevant cost is avoidable.

C : Cost behavior determines whether a cost is relevant.

D : All fixed costs are irrelevant.

B : A relevant cost is avoidable.

While many decisions made by management involve incremental analysis, which of the following types of decisions do not involve incremental analysis?

A : Sell products or process them further.

B : Make or buy, sell or process further, and retain or replace all involve incremental analysis.

C : Make or buy.

D : Retain or replace equipment.

B : Make or buy, sell or process further, and retain or replace all involve incremental analysis.

Which of the following is a qualitative factor that could affect a decision involving incremental analysis?

A : The opportunity to use productive capacity in some other manner.

B : Rent expense.

C : Increased direct labor costs.

D : Lost morale among employees when a line of business is eliminated.

D : Lost morale among employees when a line of business is eliminated.

Oliver Industries is evaluating the manufacturing process for one of their products. Oliver has determined that the process has yearly maintenance costs of $29,000, yearly operating costs of $22,000, and yearly revenues of $97,000. Two years ago, the firm spent $6,000 upgrading the equipment used to make this product, and it expects to spend $5,000 on additional upgrades three years from now. In this scenario, Oliver

A : does not have any sunk costs.

B : has sunk costs of $51,000.

C : has sunk costs of $6,000.

D : has sunk costs of $5,000.

has sunk costs of $6,000.

Liberty Bicycles manufactures 3,500 bicycles each month. Variable manufacturing costs are $45 per unit, while total fixed manufacturing costs are $52,500. Liberty normally sells its bicycles directly to retailers for $160 each. Liberty just received an offer from a new retailer that wants to purchase 1,200 bicycles at $150 each. In this scenario, Liberty should reject the offer

A : only if the firm does not have adequate manufacturing capacity.

B : only if the firm cannot reduce its total fixed costs by $18,000.

C : unless the retailer is willing to pay $160 per bicycle.

D : unless it can reduce its variable costs by $10 per unit.

A : only if the firm does not have adequate manufacturing capacity.

Aurora Enterprises incurs costs of $38 per unit ($27 variable and $11 fixed) to make a product that normally sells for $56. A wholesaler offers to buy 3,500 units at $36 each. This special order will result in additional shipping costs of $1.15 per unit. Assuming Aurora has adequate manufacturing capacity, it should
You got it wrong :
A : reject the offer because it will lead to a net loss of $11,025.

B : accept the offer because it will produce net income of $31,500.

C : reject the offer because it will lead to a net loss of $7,000.

D : accept the offer because it will produce net income of $27,475.

D : accept the offer because it will produce net income of $27,475. If Aurora accepts the offer, its revenue will increase by 3,500 X $36 = $126,000. Meanwhile, its manufacturing costs will increase by 3,500 x $27 = $94,500, plus it will incur new shipping costs of 3,500 X $1.15 = $4,025, for total costs of $94,500 + $4,025 = $98,525. This means the firm’s net income for the order would be $126,000 – $98,525 = $27,475, so Aurora should accept the offer.

Oakleaf Manufacturing incurs costs of $75 ($67 variable and $8 fixed) to make a product that normally sells for $120. A customer offers to buy 4,200 units at $70 each. Assuming Oakleaf has adequate manufacturing capacity, it should

A : reject the offer because it will result in a net loss of $12,600.

B : accept the offer because it will produce net income of $12,600.

C : reject the offer because it will result in a net loss of $21,000.

D : accept the offer because it will produce net income of $21,000.

B : accept the offer because it will produce net income of $12,600. If Oakleaf accepts the offer, its revenue will increase by 4,200 X $70 = $294,000. Meanwhile, its manufacturing costs will increase by 4,200 X $67 = $281,400. This means the firm’s net income for the order would be $294,000 – $281,400 = $12,600.

Franklin Company produces 40,000 printers per month, which is 80% of plant capacity. Variable manufacturing costs are $80 per unit, and fixed manufacturing costs are $1,200,000, or $30 per unit. The printers are normally sold directly to retailers at $150 each. Franklin has an offer from a foreign wholesaler to purchase an additional 4,000 printers at $100 per unit. Acceptance of the offer would not affect normal sales of the product, and the additional units can be manufactured without increasing plant capacity. What is the amount of increase (decrease) to net income if Franklin accepts the order?

A : $80,000

B : ($200,000)

C : $40,000

D : ($ 40,000)

A : $80,000 The amount of increase would be $80,000 [4,000 X ($100 – $80)]. The fixed manufacturing costs would not be included in the decision because there is no increase in plant activity by taking the order.

Precision Paper Products produces both paper towels and paper napkins. The production process begins with the receipt and pulping of raw timber. Once the timber is pulped, it is screened, rolled, and dried into large rolls of paper. At this point, half the paper is cut and folded into napkins, while the other half is cut, perforated, and rolled into towels. Based on this description, which of the costs listed below would NOT be classified as a joint cost?

A : The materials costs for the various chemicals involved in the pulping process.

B : The direct labor costs associated with operation of the screening machine.

C : The maintenance costs associated with the napkin folding machine.

D : The administrative costs associated with tracking and processing incoming timber shipments.

C : The maintenance costs associated with the napkin folding machine.

Designer Dollhouses manufactures dollhouse kits that are meant to be assembled by customers. Each kit sells for $60 and has $12 in fixed production costs and $10 in variable production costs. Rather than selling these kits, the firm is thinking about selling the dollhouses fully assembled for $95 each. The variable costs for assembling one dollhouse are expected to be $4 and the fixed costs are expected to be $10. Given these figures, which of the following statements is accurate?

A : Designer should sell dollhouse kits rather than assembled dollhouses because its net income per unit will be $14 higher.

B : Designer should sell assembled dollhouses rather than dollhouse kits because its net income per unit will be $21 higher.

C : Designer should sell dollhouse kits rather than assembled dollhouses because its net income per unit will be $8 higher.

D : Designer should sell assembled dollhouses rather than dollhouse kits because its net income per unit will be $43 higher.

B : Designer should sell assembled dollhouses rather than dollhouse kits because its net income per unit will be $21 higher. Currently, Designer spends $12 + $10 = $22 on each kit, which means each kit produces net income of $60 – $22 = $38. If Designer opts to assemble the dollhouses rather than selling the kits, its per unit cost will be ($12 + $10) + ($10 + $4) = $36, which means each dollhouse will produce net income of $95 – $36 = $59. Thus, Designer’s net income per unit will be $21 higher if it opts to assemble the dollhouses prior to sale.

Each day, Tasty Tortilla Company incurs total costs of $8,000 to process flour into tortillas. The company can then sell the tortillas as is for total daily revenue of $22,500. Alternatively, Tasty can fold and fry the tortillas to make hard taco shells. The additional costs for making the taco shells are $4,200 per day, and the total daily revenues from the finished shells are $26,700. Given these figures,

A : the firm will make an additional $4,200 in income per day if it sells taco shells instead of tortillas.

B : the firm’s income will remain unchanged whether it sells tortillas or taco shells.

C : the firm will make an additional $14,500 in income per day if it sells taco shells instead of tortillas.

D : the firm will make an additional $8,000 in income per day if it sells tortillas instead of taco shells.

B : the firm’s income will remain unchanged whether it sells tortillas or taco shells. Here, the $8,000 is a sunk cost, so it does not figure into our calculations. We know that total daily revenue from the tortillas is $22,500, while that for the shells is $26,700. This indicates that daily revenues would be $4,200 higher with the shells. However, with the shells, daily costs would also be $4,200 higher, so the firm will neither benefit nor suffer from selling shells instead of tortillas. Either way, the firm brings in the same daily income

Phaeton Inc. is trying to decide whether it should replace a five-year-old piece of manufacturing equipment with a new machine. When conducting the incremental analysis related to this decision, Phaeton should consider all of the following amounts except:

A : the cost of the new machine.

B : any amount received from the sale of the old machine.

C : the book value of the old equipment.

D : the variable manufacturing costs associated with the old machine.

C : the book value of the old equipment.

Five years ago, Miller Manufacturing spent $150,000 on a new piece of industrial machinery. Six months ago, the firm spent $32,000 on upgrades to the machinery. Currently, Miller is considering whether to replace the existing machine with newer machinery with a purchase price of $180,000. When conducting the incremental analysis related to this decision, Miller should consider all of the following factors except

A: the cost of the upgrades to the old machinery.

B : any differences in the variable costs associated with each piece of machinery.

C : any salvage value associated with the old machinery.

D : any salvage value associated with the new machinery

A: the cost of the upgrades to the old machinery.

Widgets Inc. is thinking about replacing a piece of manufacturing equipment with a remaining useful life of three years. The book value of the equipment is $25,000, and the machine could be sold in its current condition for $7,000. The new machine would cost $83,000 and would have no salvage value at the end of its three-year useful life. With the new machine, Widgets’ variable manufacturing costs would drop from $189,500 to $169,900 per year. If Widgets opts to buy the new machine,

A : it will see a $24,200 decrease in income over the next three years.

B : it will see a $58,800 increase in income over the next three years.

C : its total variable manufacturing costs over the next three years will be $58,800 lower than with the current machine.

D : it will be recording a loss of $25,000 on the current machine.

C : its total variable manufacturing costs over the next three years will be $58,800 lower than with the current machine. With the old machine, Widgets’ variable costs over the next three years would be $189,500 X 3 = $568,500, while with the new machine, they would be $169,900 X 3 = $509,700. This is a savings of $58,800.

Sprockets Corporation is thinking about replacing a piece of manufacturing equipment with a remaining useful life of six years. The book value of the equipment is $55,000, and the machine could be sold in its current condition for $29,000. The new machine would cost $125,000 and would have a salvage value of $25,000 at the end of its six-year useful life. With the new machine, Sprocket’s annual variable manufacturing costs would drop from $78,000 to $65,000. Given these figures, Sprockets will ________ over the next six years if it purchases the new machine.

A : decrease its net income by $47,000

B : increase its net income by $22,000

C : increase its net income by $7,000

D : decrease its net income by $18,000

C : increase its net income by $7,000 If Sprockets keeps the current machine for six years, it will have total variable costs of 6 X $78,000 = $468,000. If it buys the new machine, its total variable costs for the six-year period will be 6 X $65,000 = $390,000. However, the firm will also incur extra costs of $125,000 related to the machine, for total costs of $515,000. By purchasing the new machine, however, the firm would make $29,000 by selling the old equipment and another $25,000 by selling the new equipment for salvage at the end of the six years; this would reduce the firm’s total costs of the new machine to $515,000 – ($29,000 + $25,000) = $461,000. Thus, the firm would increase its net income by $468,000 – $461,000 = $7,000 by purchasing the new machine.

What happens if an unprofitable segment is eliminated?

A : fixed expenses allocated to the eliminated segment will be eliminated.

B : it is impossible for net income to increase.

C : variable expenses of the eliminated segment will be eliminated.

D : it is impossible for net income to decrease.

C : variable expenses of the eliminated segment will be eliminated.

Giant Inc. is thinking about eliminating one of its unprofitable product lines. When conducting incremental analysis related to this decision, Giant should ________ costs associated with the discontinued product line will remain.

A : determine what percentage of fixed

B : assume all fixed

C : assume all variable

D : determine what percentage of variable

A : determine what percentage of fixed

A firm has just saved $36,000 in fixed costs by eliminating one of its unprofitable product lines. By dropping the product line, the firm has also seen its total company-wide contribution margin drop by $50,000. These figures indicate that the firm has seen its net income ________ due to the product discontinuation.

A : drop by $86,000

B : drop by $14,000

C : increase by $14,000

D : increase by $86,000

B : drop by $14,000 The firm saves $36,000 by eliminating the product, but it also experiences a $50,000 drop in contribution margin. Because $36,000 – $50,000 = -$14,000, the net result is a $14,000 decrease in net income.

When deciding whether to retain or replace a piece of equipment, which of the following costs is irrelevant?

A : New machine costs

B : Previous repair costs

C : Future repair costs

D : Variable manufacturing costs

B : Previous repair costs

Each day, a firm manufactures 10,000 units of Product A. The firm can then either sell Product A as is or process it into Product B. Which of the following events would most likely cause the firm to reevaluate its decision of which product to sell?

A : A change in the firm’s joint materials costs.

B : A change in the relative level of consumer demand for each product.

C : A change in the firm’s joint manufacturing costs.

D : A change in the labor costs common to both products.

B : A change in the relative level of consumer demand for each product.

When will a special order need to absorb additional fixed manufacturing costs?

1. When the price offered is more than 20% below the normal sales price.
2. When the company is operating at full capacity.

A : 1 only.

B : Neither 1 nor 2.

C : Both 1 and 2.

D : 2 only.

D : 2 only.

Evans Industries receives a special purchase offer from a customer. Evans is already operating at full capacity. In order to break even, what types of costs must the order absorb?

A : Neither additional fixed manufacturing costs nor variable manufacturing costs.

B : Both additional fixed manufacturing costs and variable manufacturing costs.

C : Additional fixed manufacturing costs only.

D : Variable manufacturing costs only.

B : Both additional fixed manufacturing costs and variable manufacturing costs.

Crow Manufacturing recently replaced an old machine with a newer, more efficient machine. If the managers performed incremental analysis when making their decision, which of the following factors were most likely included in their analysis?

1. Accumulated depreciation on old machine.
2. Annual operating cost of the new machine.
3. Net cost of the new machine.

A : 1, 2, and 3.

B : 1 and 3 only.

C : 1 and 2 only.

D : 2 and 3 only.

D : 2 and 3 only.

Which of the following is true of relevant information?

A : All variable costs are relevant.

B : A relevant cost is avoidable.

C : Cost behavior determines whether a cost is relevant.

D : All fixed costs are irrelevant.

B : A relevant cost is avoidable.

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