When overhead is allocated to every product using the same manufacturing overhead rate, this rate is called the departmental overhead rate |
false |
with increased competition, managers need more accurate estimates of product costs in order to set prices and to identify the most profitable products |
true |
using departmental overhead rates is generally less accurate than using single plantwide overhead rate |
false |
cost distortion occurs when some products are overcosted while other products are undercosted by the cost allocation system |
true |
companies often refine their cost allocation systems to minimize the amount of cost distortion caused by the simpler cost allocation rate |
true |
companies that use departmental overhead rates trace direct materials and direct labor to cost objects just as they would in a traditional costing system |
true |
merchandising and service companies, as well as governmental agencies, can use refind cost allocation systems to provide their managers with better cost information |
true |
one condition that favors using a departmental overhead rate, rather than plantwide overhead rates, is that different departments incur different amounts and types of manufacturing overhead |
true |
the allocation base selected for each department should be the cost driver of the costs in the departmental overhead pool |
true |
direct labor hours would be the most appropriate cost allocation base for Machining Department that uses machine robotics extensively |
false |
ABC generally causes the least about of cost distortion among products because indirect costs are allocated to the products based on |
A: the extent to which the activities are used B: types of activities used by the product C: BOTH A and B **** D: none of the above |
four basic steps are used in an ABC system. List the proper order of these steps, which are currently scrambled below: A: identify the primary activities and estimate a total cost pool for each B: allocate the costs to the cost object using the activity cost allocation rates C: select an allocation base for each activity D: calculate an activity cost allocation rate for each activity |
a, c, d, b |
the use of which of the following costing systems is most likely to reduce cost distortion to a minimum |
activity - based costing |
machine set - up would most likely be classified as a ___ cost |
batch - level |
research and development would most likely be classified as a ___ cost |
product - level |
using factory utilities would most likely be classified as a ___ cost |
facility - level |
molding and sanding each unit of product would most likely be classified as a ___ cost |
unit - level |
in ABC, how is the activity allocation rate computed |
the total estimated activity cost pool is divided by the total estimated activity allocation base |
all of the following describe an ABC system EXCEPT |
ABC systems may only be used by service companies |
regarding activity-based costing systems, which of the following statements is TRUE |
ABC costing systems have separate indirect cost allocation rates for each activity |
cutting department overhead * |
Department overhead rate X cutting department machine hours Department overhead rate: 11 Cutting department machine hours: 8 |
finishing department overhead * |
department overhead rate X finishing department direct labor hours |
total manufactuing overhead for job 405 = 160 * |
cutting department overhead + finishing department overhead = 160 |
compute the total manufacturing cost of job 405 * |
|
activity cost allocation rate * |
total manufacturing overhead / estimated total cost driver |
activity cost allocation rate * |
|
allocated manufacturing overhead * |
activity cost allocation rate X cost driver (actual use) |
manufacturing overhead per unit * |
manufacturing overhead allocated / number of units |
activity cost allocation rate * also has job cost record -- |
total manufacturing overhead / estimated total use of cost driver |
a plant manager oversees the entire manufacturing operation |
facility level |
each container product line has a product line manager |
product level |
each type of container has its own unique molds |
product level |
each container is cut from the mold once the plastic has cooled and hardened |
unit level |
rent is paid for the building that houses the manufacturing processes |
facility level |
plastic resins are used as the main direct material for the containers |
unit level |
the extrusion machine is calibrated for each batch of containers made |
batch level |
patents are obtained for each new type of container mold |
product level |
routine maintenance is performed on the extrusion machines |
facility level |
the sales force incurs travel expenses to attend various trade shows throughout the country to market the containers |
facility level |
activity overhead rate * |
total activity over head estimated / cost allocation base estimated |
activity overhead rate * |
|
activity overhead rate * finding total job cost == going off numbers in requirement 1 that we found first |
|
predetermined manufacturing overhead rate * |
estimated total MOH costs / estimated total machine hours |
activity cost allocation rate * |
total estimated activity cost pool / total estimated activity allocation base |
activity cost allocation rate * when matched with predetermined manufacturing rate |
job cost record using activity based costing --> manufacturing overhead allocated = activity cost allocation rate column from above, X the numbers correlated in the icon for the certain job |
ABC |
activity based costing |
why and how do companies refine their cost allocation systems? |
why refine? --mismatching resources --cost distortion who can refine? --manufacturing operations --service companies and governmental agencies |
predetermined MOH rate |
total estimated manufacturing overhead costs / total estimated amount of the allocation base |
departmental overhead rates |
when to use: --departments incur different amounts and types of MOH --different jobs or products use the department resources to a different extent |
activity based costing |
-allocated indirect costs to production -focuses on activities and costs of activities -separate allocation rate for each activity |
cost hierarchy |
pyramid; bottom to top: -unit level activities -batch level activities -product level activities -facility level activities |
activity based management (ABM) |
-using ABC information to make decisions --pricing and product mix --cost cutting --planning and control |
pricing and product mix decisions |
-change the prices for products after identifying the different total cost -decide to market the higher profitability product -shift the product mix away from less profitable products |
cutting costs |
analyze costs in value chain -value-added activities -non-value-added activities -value-added vs. non-value-added |
Using ABC Outside of Manufacturing |
-Merchandising and service: Find the most profitable product or service Manufacturers: Allocate operating activities |
cost benefit test |
-Benefits are higher for companies in competitive markets: --Accurate product cost information is essential --ABM can pinpoint cost savings opportunities? -Benefits are higher when risk of cost distortion high: --Many different products, many different types/amounts of resources --High indirect costs --High- and low-volume products |
cost of adopting ABC |
-generally lower with --accounting and information system expertise to develop the system --information technology -are companies glad they adopted ABC? --89 percent of the companies say that it was worth the cost --not a cure-all, but helps managers understand costs better |
distorting costs |
-Cost system may need repair when --Managers don't understand costs and profits --Bids are lost when expected to win --Win bids expected to lose --Competitors price similar products much higher or much lower -the cost system may be outdated if there is a diversified product line |
traditional production systems |
-keep large inventories on hand -problems: --storage cost -hide quality -bottlenecks and obsolete products -solution: Lean productions system |
lean thinking |
-philosophy and a business strategy -primary goal: eliminate waste and cost -focus of JIT --purchase raw materials just in time for production --finish goods just in time for delivery |
lean production |
-Common characteristics of lean production --Value stream mapping --Production occurs in self-contained cells --> (important) --Broad employee roles --5S workplace organization --Point of use storage --Continuous flow --Pull system --Shorter manufacturing cycle times --Reduced setup times --Smaller batches --Emphasis on quality --Supply-chain management --Backflush costing |
8 wastes |
-defects -overproduction -waiting -not utilizing people -transportation -inventory -movement -excess processing |
drawbacks to lean production systems |
-Vulnerable when problems strike suppliers or distributors -Examples --Delays in delivery --Personnel problems—union strikes --Shortage of parts due to recalled products --Weather related issues |
total quality management |
Goal: Provide customers with superior products and services Continuous improvement More investment up front to generate savings in the back end of the value chain |
four types of quality costing |
1) Prevention costs—Avoid poor quality goods or services --Employee training --Improved materials --Preventive maintenance 2) Appraisal costs—Detect poor quality goods or services --Inspection throughout production --Inspection of final product --Product testing 3) Internal failure costs—Avoid poor quality goods or services before delivery to customers --Production loss caused by downtime --Rejected product units? 4) External failure costs—Incurred after defective product is delivered --Lost profits from lost customers --Warranty costs --Service costs at customer sites --Sales returns due to quality problems |
non-manufacturing costs of quality |
-Service firms and merchandising companies also incur costs of quality? -Prevention --Professional training to their staff --Develop standardized service checklists? -Appraisal costs --Review work continuously --Inspect before releasing |
cost of quality report |
-Identifies, categorizes, and quantifies all of the costs it incurs relating to quality. -Calculate the percentage of total costs of quality that are incurred in each cost category -Use as a framework for decisions |
E4-27A |
-Prevention costs --Training employees in TQM --Training suppliers in TQM --Identifying preferred suppliers who commit to ?on-time delivery of perfect quality materials -Appraisal costs --Strength testing one item from each batch ?of panels --Avoid inspection of raw materials -Internal failure costs --Avoid rework and spoilage -External failure costs --Avoid lost profits from lost sales due to disappointed customers --Avoid warranty costs |
the company has very few indirect costs |
less likely to benefit |
the company operates in a very competitive industry |
more likely to benefit |
the company has reengineered it's production process but has not changed its accounting system |
more likely to benefit |
in bidding for jobs, managers lost bids they expected to win and won bids they expected to lose |
more likely to benefit |
the company produces few products, and the products consume resources in a similiar manner |
less likely to benefit |
the company produces high volumes of some of its products and low volumes of other products |
more likely to benefit |
wages of the workers assembling products |
value-added |
engineering design costs for a new product |
value-added |
cost of moving raw materials into production |
non-value added |
salary for supervisor on the factory floor |
non-value added |
product inspection |
non-value added |
costs of reworking of defective units |
non-value added |
costs of warehousing raw materials |
non-value added |
costs arising from backlog in production |
non-value added |
a workplace organization system called "5S" is frequently used to keep work spaces clean and organized |
lean production |
suppliers make frequent deliveries of small quantities of raw materials |
lean production |
the manufacturing cycle times are longer |
traditional production |
the final operation in the production sequence "pulls" parts from the preceding operation |
lean production |
management works with suppliers to ensure detect-free raw materials |
lean production |
the workflow is continuous to attempt to balance the rate of production with the rate of demand |
lean production |
products are produced in large batches |
traditional production |
there is an emphasis on building in quality |
lean production |
employees do a variety of jobs, including maintenance and setups as well as operation of machines |
lean production |
each employee is responsible for inspecting his or her own work |
lean production |
large stocks of finished goods protect against lost sales if customer demand is higher than expected |
traditional production |
setup times are long |
traditional production |
suppliers can access the company's intranet |
lean production |
loan approval files frequently contain errors |
defects |
the accounting report produces segment reports because the reports have been produced for years even though managers use other reports to manage their divisions |
overproduction |
office supplies are stockpiled in the supply closet; the office manager buys in large quantities when there are sales |
inventory |
sales orders are put into the computer by the sales people in the field and paper reports are generated; these sales orders are then entered into the order processing system by clerks who type the orders based on the paper reports |
excess processing |
the office computers are slow to do the processing; the computers need to be upgraded |
waiting |
orders in the system are frequently missing information |
defects |
employees do not have the authority and responsibility to make routine decisions |
not utilizing people to their full potential |
the files needed for loan approval are carried to and from the file storage office when the files are needed |
transportation |
to retrieve inventory records, clerks must click through several menus in the program to get the record needed |
movement |
approval of loans is done in batches once a week rather than as the loan paperwork is finished for each individual loan |
waiting |
each time a document needs to be notarized, someone must search for the notary seal (used to make the seal impression on the document) |
movement |
the computer system requires frequent restarting; restarting takes five minutes |
waiting |
paperwork (that might change) is printed before it is needed |
overproduction |
the office manager insists that a spreadsheet program must be used to store customer records, even though it would be more efficient to use a database program |
excess processing |
the office is run by the office manager; employees do as they are told |
not utilizing people to their full potential |
pending vacation requests must be taken to the third floor offices to get the signature of the human resource manager |
transportation |
Roles of plant employees |
Lean companies focus on employee empowerment to combat the waste of not fully utilizing employees. Lean employees hold broader roles than their counterparts at traditional companies. As a result, employees tend to have higher morale. |
Manufacturing cycle times |
Lean companies put great emphasis on shortening their manufacturing cycle times. This will reduce the time needed to fill customer orders |
Quality |
Lean companies stress high quality in every aspect of production. Since lean companies have very little, if any, stock, they need to be able to produce the product right the first time. Lean producers tend to "build-in" quality, rather than "inspect-in" quality as traditional firms do. |
Inventory levels |
Lean companies strive to maintain low inventory levels. Lean companies try to purchase raw materials "just in time" to meet the production schedule, and have the finished inventory ready "just in time" to meet customer demand. Traditional companies maintain greater quantities of raw materials, work in process and finished goods inventory. |
Batch sizes |
Lean companies produce units in much smaller batches than traditional companies. Smaller batch sizes allow lean companies to reduce customer response times. |
Setup Times |
Lean companies stress short setup times. By keeping set-up times at this length, lean companies can be more flexible in scheduling production to meet customer orders |
Workplace Organization |
Lean companies use the "5S" organization system to keep the workplace clean and organized. By organizing the plant this way, lean companies work efficiently with fewer defects, in a safer workplace, and with fewer unscheduled repairs. |
traditional cost systems with a single-allocation base tend to overcost high-volume products and undercost low-volume products as compared to activity-based costing systems |
true |
there will be little benefit to using an activity-based costing system when products are vastly different from each other and consume different amounts of resources |
false |
activity-based management refers to using activity-based cost information to make decisions that may increase profits while satisfying customers' needs |
true |
managers often reap benefits by using ABC data in ABM to pinpoint opportunities to cut costs |
true |
ABC can be used in routine planning and control decisions as well as pricing, product mix and cost cutting decisions |
... |
the benefits of adopting ABC/ABM are higher for companies in more competitive markets |
true |
the goal of value-engineering is to eliminate all waste in the system by making the company's processes as effective and efficient as possible |
true |
value-engineering is accomplished by eliminating, reducing, or simplifying all non-value added activities, and examining whether value-added activities could be improved |
true |
the goal of value-engineering is to |
1) improve value-added activities 2) eliminate or reduce non-value activities ** both A and B |
non-value added activities are |
-activities that could be reduced or removed from the process with no ill effect on the end product or service -also called waste activities -activities that neither enhance the customer's image of the product or service nor provide a competitive advantage -ALL OF THE ABOVE** |
the costs of adopting ABC may be lower for some companies than for others. This situation may occur |
-when a company has the accounting and information system expertise to develop the system -when a company has the information technology to record and compile cost driver date - EITHER SITUATION A or B *** |
the benefits of adopting ABC/ABM are higher for companies in competitive markets because |
because ABM can pinpoint opportunities for cost savings |
indications that a product cost system needs revision include |
- managers lose bids they expected to win and win bids they expected to lose - employees do not believe the cost numbers are accurate - the company uses a single-allocation-base system developed long ago -ALL OF THE ABOVE ** |
which of the following is a sign that product cost system is not working properly |
managers don't understand costs and profits |
a system that focuses on activities as the fundamental cost object and uses the costs for these activities to compile indirect costs of goods and services is |
activity-based costing |
the eight wastes of traditional operations includes all of the following except |
utilizing people to their full potential |
which of the following is a lean strategy |
produce in a smaller batches than a traditional system |
which of the following is true about lean thinking |
customer orders drive the production process |
which of the following is not a factor in the success of a lean company |
inflexible production operations |
the management strategy designed to eliminate waste is called |
lean thinking |
which of the following items is NOT a characteristic of a lean company |
machines are arranged by function |
which term listed below describes a system where companies purchase raw materials when needed in production and complete finished goods when needed by customers |
just-in-time |
lean thinking is a management strategy that includes maintaining large inventories |
false |
lean thinking is a management philosophy that strives to create value by eliminating waste |
true |
lean companies typically arrange production activities into self-contained cells |
true |
product line manager salary |
product level |
machine setup costs that are incurred whenever a new production order is started |
batch level |
patent for new product |
product level |
factory utilities |
facility level |
direct materials |
unit level |
cost to inspect each product as it is finished |
unit level |
CEO salary |
facility level |
engineering costs for new product |
product level |
order processing |
batch level or unit level |
depreciation on factory |
facility level |
direct labor |
unit level |
shipment of an order to a customer |
batch level or unit level |
plantwide overhead rate * |
total manufacturing overhead / total machine hours |
department overhead rate * |
total department overhead / department machine hours |
prevention costs * |
-personnel training -preventative maintenance |
appraisal costs * |
-inspecting products at half-way point -inspection of raw materials |
internal failure costs * |
- production loss due to machine breakdowns -costs of defective products -cost of disposing of rejected products |
external failure costs * |
- recall of batch #59374 - warranty claims |
Do any additional subjective costs appear to be missing from the report? |
Because the company has warranty returns and has had a product recall, the company may suffer a reputation for poor quality products. If so, they are probably losing profits from losing sales. Unsatisfied customers will be reluctant to buy from the company again. This report does not include an estimate of the lost profits arising from a reputation for poor-quality products. |
What can be learned from the report? |
The costs of quality report shows that very little is being spent on prevention and appraisal, which is probably why the internal and external failure costs are so high. It appears that the company is inspecting the product half-way through the production process and not again at the end of the process. Perhaps that is the reason their external failure costs are so high. The CEO should use this information to develop quality initiatives in the areas of prevention and appraisal. Such initiatives should reduce future internal failure and external failure costs. |
strength-testing one item from each batch of panels |
appraisal |
training employees in TQM |
prevention |
training suppliers in TQM |
prevention |
identifying preferred suppliers who commit to on-time delivery of perfect quality materials |
prevention |
avoid lost profits from lost sales due to disappointed customers |
external failure |
avoid rework and spoilage |
internal failure |
avoid inspection of raw materials |
appraisal |
avoid warranty costs |
external failure |
quality-related costs generally fall into four different categories, which include all of the following except |
transportation costs |
on a cost of quality report, which of the following cost items should be classified as a prevention cost |
technical support provided to suppliers |
which of the following is an example of a cost item that should be classified as an internal failure cost |
rework costs |
which of the following is an example of a cost item that should be classified as an external failure cost |
warranty claims |
if a company were to decrease its prevention costs by eliminating employee training, the company's external failure costs would most likely |
increase |
on a cost of quality report, which of the following cost items would be classified as an external failure cost |
customer returns of defective products |
costs incurred in detecting poor quality goods or services are what type of costs |
appraisal costs |
what type of costs are incurred to avoid poor quality goods or services in the first place |
prevention costs |
the costs incurred when poor quality goods or services are detected and corrected before deliver to customers are called ___ costs |
internal failure |
the cost of evaluating potential raw material suppliers is an example of what type of cost |
prevention cost |
the lost profits from lost customers are an example of what type of cost |
external failure costs |
the costs of training production personnel on their job tasks is an example of which of the following types of costs |
prevention costs |
production loss caused by downtime is an example of a(n) |
internal failure cost |
which of the following cost of quality categories represent the cost incurred to "re-inspect a reworked blender?" |
internal failure costs |
which of the following cost of quality categories represent the cost incurred to seek and fine a new supplier that can provide quality raw materials compared to the low-quality raw materials received form a current supplier |
prevention costs |
total fixed costs do not change in response to changes in the volume of production |
true |
fixed costs per unit decrease as production levels increase |
true |
an expense such as advertising could be considered a discretionary fixed cost |
true |
the line on a graph representing total fixed costs will be a horizontal line |
true |
total variable costs change in direct proportion to changes in volume |
true |
the variable cost per unit of activity increases as activity increases |
false |
when graphing total fixed costs, the fixed cost per unit is the slope of the fixed cost line |
false |
when graphing total fixed costs, the cost line always begins at the origin |
false |
the graph of total variable cost will be a horizontal line over all activity levels within the relevant range |
false |
when graphing total variable costs, the cost line begins at the origin |
true |
total mixed costs increase as volume increases because of the variable cost component |
true |
total mixed cost graphs slope upward but do not begin at the origin |
true |
total mixed cost graphs intersect at the y-axis at the level of fixed costs |
true |
relevant range is the range of activity (volume) over which total fixed costs and variable costs per unit can be assumed to remain the same |
true |
in the equation y=vx+f, the x represents the fixed costs |
false |
in the equation y=vx+f, the f represents the volume of activity |
false |
cost behavior can be mathematically expressed using equations |
true |
the equation for a straight line is y=fx+v, where y is the total cost, f is the fixed cost per unit, x is the volume of activity, and v is the variable cost per unit |
false |
total fixed costs can be expressed as y=vx, where y=total variable cost, v=variable cost per unit of activity, and x=volume of activity |
false |
total fixed costs can be expressed as y=vx, where y=total variable cost, v=variable cost per unit of activity, and x=volume of activity |
false |
if production increases by 25 percent, how will total fixed costs likely react |
remain the same |
if production increases by 30 percent, how will total variable costs likely react |
increase by 30 percent |
which of the following would be considered a discretionary fixed cost |
advertising |
which of the following would be considered a committed fixed cost |
depreciation |
management has little or no control over |
committed fixed costs |
fixed, variable, mixed costs * |
|
fixed cost per basketball * |
|
total variable costs + total fixed costs * |
= Total production costs -- total variable cost=total variable cost /original packages produced --> X that number by how many packages are going to be produced -- total fixed cost = total manufacturing costs - total variable costs ---> then add those two numbers together |
depreciation on equipment used to stitch the shoe together |
fixed |
shoelaces |
variable |
patents on the process used to create materials used in the shoe |
fixed |
rice husk filler (used to make the rubber-like outsole) |
variable |
recycled polyester fibers (used to make the synthetic suede in the show upper) |
variable |
glue |
variable |
quality inspectors salary |
fixed |
following schedule for 3 volumes * |
total fixed costs = total variable cost/total garments (very top number) variable cost per garment = fixed cost per garment X total garments (top number) -- to find if it is underestimated or over estimated, you take the last average cost per garment X how many garments they ask for in part 3, and then subtract that from the first total operating costs box |
cost behavior |
how costs change as volume changes |
3 common cost behaviors |
Variable costs Fixed costs Mixed costs |
Key Characteristics of Variable Costs |
Total variable costs change in direct proportion to changes in volume Variable cost per unit remains constant Slope |
cost graphs |
Vertical (y-axis) always shows total costs Horizontal axis (x-axis) shows volume of activity Note that the variable cost per customer remains constant in each of the graphs. |
cost equation |
Is a mathematical equation for a straight line, to predict total cost Variable cost line can be mathematically expressed? total variable cost (y)= variable cost per unit of activity (v) X volume of activity (x) |
key characteristics of variable costs |
-total variable costs change in direct proportion to changes in volume -the variable cost per unit of activity (v) remains constant and is the slope of the variable cost line -total variable cost graphs always begin at the origin (if volume is zero, total variable costs are zero) -total variable costs can be expressed as follows: y=vx where, y=total variable cost v=variable cost per unit of activity x=volume of activity |
key characteristics of fixed costs |
- total fixed costs stay constant over a wide range of volume -total fixed costs per unit of activity vary inversely with changes in volume: --fixed cost per unit of activity increases when volume decreases --fixed cost per unit of activity decreases when volume increases -total fixed cost graphs are always flat lines with no slop that intersect the y-axis at a level equal to total fixed costs -total fixed costs can be expressed as y=f where, y=total fixed cost f=fixed cost over a given period of time |
key characteristics of mixed costs |
total mixed costs increase as volume increases because of the variable cost component - mixed cost per unit decrease as volume increases because of the fixed cost component -total mixed costs graphs slop upward but do not begin at the origin-- they intersect at the y-axis at the level of fixed costs -total mixed costs can be expressed as a combination of the variable and fixed cost equations: total mixed costs=variable cost component + fixed cost component y=vx +f where, y= total mixed costs v= variable cost per unit of activity (slope) x= volume of activity f= fixed cost over a given period of time (vertical intercept) |
relevant range |
Band of volume where total fixed costs remain constant at a certain level Variable costs per unit remain constant at a certain level |
Sustainability and Cost Behavior |
-Sustainable companies and changes in cost behavior --E-banking and e-billing drive down variable costs Greener lifestyles Environmental Impact |
cost behavior analysis |
Four methods to analyze cost behavior Account analysis Scatter plots High-low method Regression analysis |
account analysis |
Use of judgment to classify each general ledger account as variable, fixed, or mixed Subjective |
scatter plot |
Use historical data to determine a cost's behavior Scatter plot is the graph of historical cost data on the y-axis and volume data on the x-axis Helps managers visually determine how strong the relationship is between the cost and the volume of the chosen activity base |
high-low method |
Step 1: Find variable cost per unit (slope) of cost line Step 2: Find the fixed costs (vertical intercept) Step 3: Create the cost equation Advantage: Easy to use Disadvantage: Only uses 2 data points |
R-Square Value |
"Goodness of fit" How well does the line fit the data points? Ranges from 0 to 1 |
Data Concerns |
Data Concerns --Only valid within relevant range --Seasonal variations --Inflation --Outliers—abnormal data points |
Absorption Costing |
Required by GAAP for external reporting Assign all manufacturing costs to products (DM, DL, Variable MOH, and Fixed MOH) |
Variable Costing |
Assigns only variable manufacturing costs to products (DM, DL, and Variable MOH) Fixed manufacturing overhead = period cost For internal management decisions Contribution margin income statement |
Reconciling Operating Income Between the Two Costing Systems |
difference in operating income= (change in inventory level, in units) X (fixed MOH per unit) |
Absorption Costing and Manager Incentives |
When inventories increase, absorption costing income is higher than variable costing income. When inventories decrease, absorption costing income is lower than variable costing income. Therefore . . . managers may increase production to build up inventory to maximize income and, therefore, their own bonus. |
what is true about a scatter plot |
if there is a strong relationship between cost and volume, the points will fall in a linear pattern |
using account analysis, what type of cost is the rental of a space at $6000 per month |
fixed |
using account analysis, what type of cost is the local phone service which charges a plat fee for unlimited local calls |
fixed |
using account analysis, what type of cost is the price of gasoline when your car gets 30 miles per gallon and each gallon costs $3.65 |
variable |
using account analysis, what type of cost is a community activity pass that costs $80 plus $15 per event |
mixed |
manufacturing overhead (consisting of costs like factory rent, factory utilities, factory maintenance, and other similar costs) is usually |
mixed |
which method are managers using when they use their judgement to classify costs as variable, fixed, or mixed |
account analysis |
when preparing a scatter plot, how should the data be graphed |
cost data on the y-axis |
what are scatter plots used for |
-determining the overall strength of the relationship between historical cost and volume -identifying potential outliers *BOTH OF THE ABOVE |
the high-low method is theoretically better than regression analysis because the high-low method uses more data points than regression analysis |
false |
if there is little or no relationship between the cost and the volume, the data points on a scatter plot will appear almost as a straight line |
false |
a scatter plot will help managers identify potential outliers |
true |
if a scatter plot reveals a fairly weak relationship between cost and volume, the cost equation based on that data would not be very useful for predicting future costs |
true |
outliers are data points that fall in the same general pattern as the other data points |
false |
if a manager sees a potential outlier in the data, he or she should first determine whether the data is correct |
true |
variable cost (slope) * |
change in cost/change in volume |
fixed cost * |
total operating cost - total variable cost |
traditional income statement ** |
Sales revenue LESS: COGS - Gross profit LESS: -operating expenses -sales commissions -payroll costs -lease Operating income = |
contribution margin income statement ** |
Sales revenue LESS: -variable expenses -COGS -sales commissions Contribution margin LESS: -fixed expenses -payroll costs -lease Operating income |
the data points with the ___ should be selected for use in calculating the variable cost per unit and the total fixed costs when using the high-low method |
highest volume and the lowest volume |
which step is performed first when using the high-low method |
find the slope |
when using the high-low method, what is the correct order of the following three steps --> 1) write the cost equation 2) find the vertical intercept 3) find the slope |
3,2,1 |
when using the high-low method, the variable cost per unit can be found as |
rise over run |
the tennis club where you play charges $50 per month and $10 per hour of court time. If your current month's bill is $100, how many hours of court time did you use |
5 hours |
on a regression analysis output generated with excel, a regression equations fixed cost component is represented by the |
intercept coefficient |
on a regression analysis output generated with excel, a regression equations "goodness of fit" component is represented by the |
R-square |
on a regression analysis output generated with excel, the slope of a mixed cost line is represented by the |
x variable 1 coefficient |
when predicting costs at other volumes using a cost equation derived from either the high-low method or regression analysis, managers should consider |
Seasonality Outliers General inflation D - ALL OF THE ABOVE |
if a regression analysis shows an R factor of 0.15, it is safe to assume |
a very weak relationship between cost and volume |
variable cost per unit * |
change in costs / change in volume |
total fixed costs * |
total mixed (operating) cost - total variable cost mixed operating costs = highest dollar value total variable cost = highest number in the opposite column X variable cost per unit |
Contribution margin income statemet |
Sales Revenue LESS: variable expenses cost of goods sold variable selling and marketing expenses variable website maintenance expenses other variable operating expenses Contribution margin LESS: fixed expenses fixed selling and marketing expenses fixed website maintenance expensfes other fixed operating expenses Operating income |
contribution margin per passenger * |
sales price per passenger - variable cost per passenger |
contribution margin ratio * |
contribution margin per passenger / sales price per passenger operating income --> __ passengers X contribution margin per passenger - fixed expenses operating income --> __ $ amount X contribution margin ratio - fixed expenses |
operating income increase * |
contribution margin per passenger X additional tickets sold |
total contribution margin less total fixed expenses equals |
operating income |
the unit contribution margin is computed by |
subtracting the variable cost per unit by the sales revenue |
the contribution ratio explains the percentage of each sales dollar that |
contributes towards fixed costs and generating a profit |
CVP analysis assumes all of the following except |
inventory levels will increase |
by multiplying ___ and then subtracting fixed cots, managers can quickly forecast the operating income |
projected sales revenue by the contribution margin ratio |
managers can quickly forecast the total contribution margin by multiplying the |
projected sales revenue by the contribution margin ratio |
contribution margin ratio is computed by |
dividing contribution margin by sales revenue |
to find the sales revenue (sales in dollars) needed in order to breakeven or generate a target profit, the formula used is |
(fixed expenses + operating income) / contribution margin ratio |
to find the breakeven point using the shortcut formulas, you use |
zero for the operating income |
to find the number of units that need to be sold to breakeven, the formula used could be |
fixed expenses / contribution margin per unit |
to find the sales revenue needed to breakeven, the formula used could be |
fixed expenses / contribution margin ratio |
when using the income statement approach to finding breakeven, which of the following is true |
sales revenue - variable expenses - fixed expenses = operating income |
on a CVP graph, the total cost line intersects the total revenue line at which of the following points |
the break even point |
which of the following is NOT an approach used to calculate the breakeven point |
the balance sheet approach |
the breakeven point may be defined as the number of units a company must sell to do which of the following |
generate a zero profit |
sales above the breakeven point indicate a ___, where sales below the breakeven point indicate a ___ |
profit;loss |
the line that begins at the origin on a CVP graph represents |
total sales revenues |
breakeven units * |
fixed expenses + operating income / contribution margin per unit |
breakeven sales * |
fixed expenses + operating income / contribution margin ratio |
target sales units * |
fixed expenses + operating income / contribution margin per unit |
Description of CVP graph * |
A: fixed expense line B: total expense line C: sales revenue line D: dollars (vertical axis) E: units (horizontal axis) F: operating loss area G: operating income area H: breakeven point I: 150 J: 300 |
contribution margin per unit * |
sales price per unit - variable cost per unit |
break even sales in units * |
operating income + fixed expenses / contribution margin per unit |
break even sales in dollars * |
fixed expenses + operating income / contribution margin ratio |
find the number of packages Trendy Ten needs to sell to earn 23000 operating income |
fixed expenses + operating income / contribution margin per unit |
operating income projection * |
sales revenue X contribution ration Contribution margin fixed costs |
when absorption costing is used and management bonuses are related to operating income, managers are more likely to |
increase inventory levels |
on a traditional income statement, sales revenue less cost of goods sold equals |
gross profit |
for external reporting purposes, U.S. GAAP allows companies to |
only the traditional format of the income statement |
on a contribution margin income statement, sales revenue less variable expenses equals |
contribution margin |
on a traditional income statement, all manufacturing-related costs, whether fixed or variable, are listed |
above the gross profit line |
the contribution margin income statement presents ___ above the contribution margin line |
all variable expenses |
the contribution margin income statement presents ___ below the contribution margin line |
all fixed expenses |
which of the following statements ins true concerning income if production exceeds units sold |
a higher operating income will result under an absorption costing income statement |
how is operating income affected if the number of units sold exceeds the number of units produced |
operating income would be higher under a variable costing income statement |
which type of costing system is the only acceptable costing system for external financial reporting |
absorption costing |
a basic tenet of variable costing is that fixed manufacturing overhead costs be currently expensed. what is the rationale behind this |
fixed manufacturing overhead costs occur regardless of level of production |
net income reported under absorption costing will exceed net income reported under variable costing for a given period if |
production exceeds sales for that period` |
the income statement is organized by ___ under absorption costing |
product and period costs |
what will happen to the contribution margin if fixed costs related to a product increase while variable costs and sales price remain constant |
will not change |
what factor related to manufacturing costs causes the difference between operating income computed using absorption costing and operating income computed using variable costing |
absorption costing "inventories" all fixed manufacturing costs |
income statement using variable costing * |
Sales revenue LESS: variable expenses variable costs of goods sold variable operating expenses Contribution margin LESS: fixed expenses fixed manufacturing overhead fixed operating expenses Operating income HOW to do calculations: 1) Sales revenue: number of units sold X the sales price per unit 2) Variable costs of goods sold: total variable costs per unit X number of units 3) Variable operating expenses: number of units sold X the variable operating expenses per unit sold 4) Fixed manufacturing overhead: is given 5) Fixed operating expenses: is given |
Income Statement using absorption costing * |
Sales revenue LESS: cost of goods sold gross profit LESS: operating expenses OPERATING INCOME Calculations: Sales revenue is same as variable costing from above 2) cost of goods sold: fixed manufacturing overhead in total for the year / units manufactured and sold for the year. + variable manufacturing costs per unit manufactured X units manufactured and sold for the year 3) operating expenses: # of units X variable operating expenses per unit sold + fixed operating expenses |
Contribution margin per unit table * |
Sales price per ticket LESS: variable cost per ticket =contribution margin per ticket X sales mix =contribution margin |
margin of safety in units * |
expected sales in units - breakeven sales in units |
margin of safety in dollars * |
expected sales in dollars - breakeven sales in dollars |
operating leverage factor * |
contribution margin / operating income |
which of the following statements is true if the sales price per unit decreases while the variable cost per unit and total fixed costs remain constant |
the contribution margin decreases and the breakeven point increases |
if the sales price per unit increases while the variable cost per unit and total fixed costs remain constant, which of the following statements is true |
the contribution margin increases and the breakeven point decreases |
if the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant, which of the following statements is true |
the contribution margin increases and the breakeven point decreases |
if the fixed costs increase while the sales price per unit and variable costs per unit remain constant, which of the following statements is true |
the contribution margin stays the same and then breakeven point increases |
if the variable cost per unit increases while the sale price per unit and total fixed costs remain constant, which of the following statements is true |
breakeven point in units increases |
if total fixed costs decrease while the selling price er unit and variable cost per unit remain constant, which of the following statements is true |
breakeven point in units decreases |
if a company sells 13 of Product A for every 3 of Product B that it sells, the sales mix can be stated as |
both 13:3 and 13/16 A and 3/16 B are correct |
fixed costs divided by weighted average contribution margin per unit equals |
breakeven sales in units |
contribution margin less fixed costs yields |
operating income |
gabe industries sells two products, basic models and deluxe models. basic models sell for 42 dollars per unit with variable costs of 30 dollars per unit. deluxe models sell for 50 dollars per unit with variable costs of 40 dollars per unit. total fixed costs for the company are 75,400 dollars. gabe industries typically sells four basic models for every deluxe model. what is the breakeven point in total units |
6500 |
sally's fries sells three large fries for every two small ones. a small fry sells for 2 dollars with a variable cost of 1 dollar. a large fry sells for 3 dollars with a variable cost of 1.25 dollars. what is the weighted average contribution margin |
1.45 |
company A has a higher margin of safety while company b has a lower margin of safety. company a would be considered ____ company b when considering only margin of safety |
less risky than |
a company's margin of safety is computed by |
expected sales - sales at breakeven |
all else being equal, a company with a high operating leverage will have |
relatively high contribution margin ratio |
all else being equal, a company with a low operating leverage will have |
relatively high variable costs |
to find a firm's operating leverage factor at a given level of sales, you |
divide the contribution margin by operating income |
by multiplying the operating leverage factor by the anticipated percentage change in volume, one can find |
the anticipated change in operating income |
the higher the operating leverage factor, the |
greater the impact of volume on operating income |
all of the following would be considered a company with high operating leverage, except |
retailer |
total predicted sales (in unites) minus the total breakeven sales in units divided by total predicted sales (in units) yields |
margin of safety percentage |
margin of safety in units * |
Expected sales in units - breakeven sales in units * breakeven sales in units = fixed expenses + operating income / contribution margin per unit |
margin of safety in dollars * |
expected sales in dollars - breakeven sales in dollars * expected sales in dollars = expected amount to sell X sales price * breakeven sales in dollars = breakeven sales in units X sales price |
margin of safety as a percentage of sales * |
margin of safety in dollars / expected sales in dollars * expected sales in dollars = expected amount to sell X sales price |
operating leverage factor * |
1) contribution margin / operating income * contribution margin = expected posters sold X (sales price - variable cost) * operating income = total contribution margin - fixed expenses 2) increase in operating income = increase in volume (percent) X operating leverage factor 3) original volume (posters) + increase in volume (increase in volume = volume increase X original posters) |
Cedric and marc work at the same company. cedric, the manager of a production department, buys lunch for marc, who works in accounting ..... |
integrity |
tomas' company has signed him up for outside training on operating leverage and cost structures .... |
competence |
heather provides reports to key decision makers based on CVP assumptions despite knowing that the decision makers are looking at situations ..... |
competence |
kara works in accounting at a chain of car dealerships. her best friend, nikki, is looking for a new car.... |
confidentiatlity |
gayle is an accountant for BuySmart, a cooperative grocery chain. gayle prepares internal reports with the breakeven volumes for each division listed |
credibility |
sales in units * |
fixed expenses + operating income / contribution margin per unit ** use the original package price - the variable cost it needs to be changed to, use the increased fixed costs (second one) |
Operating income statement * |
1) contribution margin per unit X average sales volume units = contribution margin LESS: fixed expenses = operating income * average sales volume units = use the "most locations WERE selling 2) new contribution margin per unit ('lower sales price per bowl' - 'variable costs would be') X new sales volume units ('each restaurants volume to increase 8,000 bowls') = contribution margin LESS: new fixed expenses (original fixed expenses + ('400 advertising costs) |
target sales in dollars * |
fixed expenses + operating income / contribution margin ratio * fixed expenses + monthly operating income / new contribution margin ratio requirement 2) (sales in dollars X shrunk contribution margin ratio) - operating income = fixed expenses --> old fixed expenses - new fixed expenses = amount of fixed costs to cut |
computing weighted-average contribution margin per unit, first identify the formula labels * |
sales price per unit LESS: variable cost per unit = contribution margin per unit sales mix =contribution margin == weighted average contribution margin per unit ** fixed expenses + operating income / weighed-average CM per unit = breakeven sales in units * sales mix --> 4:1 sales mix --> add 4 + 1 contribution margin --> add them together ** weighted average contribution margin per unit --> divide 65 by 5 |
breakeven sales in units * |
fixed expenses + operating income / weighted-average CM per unit --> breakeven sales in units X product line's proportion |