# Managerial Accounting Exam 2 Test Questions – Flashcards

## Unlock all answers in this set

question
break even point
the level of sales at which profit is zero
question
contribution margin ratio
a ratio computed by dividing contribution margin by dollar sales
question
degree of operating leverage
a measure at a given level of sales of how a % change in sales will affect profits. the degree of operating leverage is computed by dividing contribution margin by net operating income
question
margin of safety
the excess of budgeted or actual dollar sales over the break even dollar sales = total sales - break even sales divide that number by actual sales to get % or divide that number by unit price to get margin of safety units
question
operating leverage
a measure of how sensitive net operating income is to a given percentage change in dollar sales CM / NI to get % increase in profits multiply % increase in sales by the operative leverage
question
target profit analysis
# of units sold to attain a certain profit equation method and formula method both work
question
variable expense ratio
total variable expense divided by total sales OR variable expense per unit divided by unit selling price
question
how is contribution margin ratio useful in planning business operations
it is used in target profit and break even analysis and can be used to quickly estimate the effect on profits of a change in sales revenue
question
in all respects company A and B are identical except company A's costs are mostly variable while company B's costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits?
Company B, with its higher fixed costs and lower variable costs will have a higher contribution margin ratio than company A. therefore it will tend to realize a larger increase in contribution margin and in profits when sales increase
question
key assumptions of CVP analysis
1. selling price is constant 2. costs are linear and can be accurately divided into variable (constant per unit) and fixed (constant in total)
question
contribution income statement is helpful in...
judging the impact on profits of changes in selling price, cost, or volume. the emphasis is on cost behavior
question
contribution margin
amount remaining from sales revenue after variable expense has been deducted. Contribution margin is used first to cover fixed expenses; only remaining contribution margin contributes to net income
question
to estimate profits at a particular sales volume
# of units sold times the contribution margin per unit
question
CVP relationship in equation form
profit= (sales-variable expense) - fixed expense Profit= (P x Q - V x Q) - FE Profit= unit cm x Q - FE Profit= (CMR x Sales) - FE
question
unit contribution margin formula
unit cm= selling price per unit - variable expense per unit unit cm= P - V
question
CM ratio
total CM divided by total sales OR CM per unit divided by sale price per unit always 100% for sales
question
shortcut for changes in Fixed cost and sales volume
increase in CM - increase in adv expense or any expense added = change in net income
question
unit sales to break even
fixed expense divided by contribution margin per unit
question
dollar sales to break even
fixed expense divided by contribution margin ratio
question
unit sales to attain target profit
= (target + FE)/ CM per unit
question
dollar sales to attain target profit
= (target + FE) / CMR
question
cost structure
relative proportion of fixed and variable costs in an organization - managers often have some latitude in determining their organizations cost structure
question
High Fixed Cost with low variable cost
income will be higher in good years and lower in bad years
question
Low Fixed Cost with high variable cost
enjoy greater stability in income across good and bad years
question
absorption cost
includes all manufacturing costs (DM, DL, VMOH, FMOH) in unit product costs
question
common fixed cost
a fixed cost that supports more than one business segment but is not traceable in whole or in part of any one of the business segments
question
segment
any part or activity of an organization about which managers seek cost, revenue, or profit data ex: departments, operations, sales, territories, divisions, product lines
question
segment margin
a segments CM - its traceable FC represents margin available after a segment has covered all of its own traceable costs
question
traceable fixed cost
a fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated
question
variable costing
a costing method that includes only variable manufacturing costs (DM, DL, VMOH) in unit product costs
question
what is the basic difference between absorption costing and variable costing?
under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing. fixed manufacturing overhead is treated as a period cost and is immediately expensed on the income statement
question
are selling and admin expenses treated as product costs or as period costs under variable costing?
selling and admin expenses are treated as period costs under both variable and absorption
question
explain how FMOH costs are shifted from one period to another under absorption costing
FMOH costs are included in product costs, along with DM, DL, and VMOH. if some of the units are not sold by the end of the period then they are carried into the next period as inventory. When the units are finally sold, the FMOH cost that had been carried over with the units is included as part of that period's CGS.
question
what are arguments in favor of treating FMOH costs as product costs
absorption costing advocates argue that absorption costing does a better job of matching costs with revenues than variable costing. they argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units which they are sold. they believe that no distinction should be made between variable and fixed manufacturing costs for the purposes of matching costs and revenues
question
what are the arguments in favor of treating FMOH costs as period costs
advocates of variable costing argue that FMOH costs aren't really the cost of any particular unit of product. If a unit is made or not, the total fixed manufacturing costs will be the same. Therefore, how can one say that these costs are part of the costs of the products? These costs are incurred to have the capacity to make products during a particular period and should be charged against the period as period costs according to the matching principle
question
if the units produced and unit sales are equal which method would you expect to show the higher net operating income, variable or absoption
Net income should be the same under absorption and variable costing. inventories do not increase or decrease and therefore under absorption, FMOH costs cannot be deferred in inventory or released from inventory
question
if the units produced exceed unit sales, which method would you except to show higher net operating income
absorption costing will usually show a higher net operating income than variable costing. when production exceed sales, inventories increase and under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to the next period. in contrast, all of the FMOH cost of the current period is immediately expensed under variable costing
question
if FMOH costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?
the inventory levels must have decreased and therefore production must have been less than sales
question
under absorption costing, how is it possible to increase NI without increasing sales
under absorption, NI can be increased by increasing the level of production without any increase in sales. if production exceeds sales, the unites of product are added to inventory. These units carry a portion of the current period's FMOH costs into the inventory account, reducing the current period's reported expenses and causing net operating income to increase
question
how does lean production reduce or eliminate the difference in reported net operating income between absorption and variable costing
arise because of changing levels of inventory. In lean production, goods are produced strictly to customers' orders. With production tied to sales, inventories are largely (or entirely) eliminated. If inventories are completely eliminated, they cannot change from one period to another and absorption costing and variable costing will report the same net operating income.
question
what costs are assigned to a segment under the contribution approach?
costs are assigned to a segment if and only if the costs are traceable to the segment (i.e. could be avoided if the segment were eliminated). common costs are not allocated to segments under the contribution approach
question
segment margin vs contribution margin
CM is the difference between sales revenue and variable expenses. SM is the amount remaining after deducting traceable fixed expenses from the CM. the CM is useful as a planning tool for many decisions, particularly those in which fixed costs don't change. The segment margin is useful in assessing the overall profitability of a segment
question
why aren't common costs allocated to segments under the contribution approach?
costs of segments would be overstated and their margins would be understated. some segments may appear to be unprofitable and managers may be tempted to eliminate them. If a segment were eliminated because of the existence of arbitrarily allocated common costs, the overall profit of the company would decline and the common cost that had been allocated to the segment would be reallocated to the remaining segments—making them appear less profitable.
question
how is it possible for a cost that is traceable to a segment to become a common cost if the segment is divided into further segments?
there are often limits to how far down an organization a cost can be traced. costs that are traceable to a segment may become common as that segment is divided into smaller segment units. for example, the cost of nation TV and print advertising might be traceable to a specific product line but be a common cost of a geographical sale territory
question
should a company allocate its common fixed expenses to business segments when computing the break even point for those segments? why?
NO. these costs are not traceable to individual segments and will not be affected by segment level decisions
question
variable costing product costs
DM, DL, VMOH
question
variable costing period costs
question
absorption costing product costs
DM, DL, VMOH, FMOH
question
Absorption costing period costs
question
units produced = units sold
no change in inventory absorption = variable
question
units produced > units sold
inventory increases absorption > variable
question
units produced < units sold
inventory decreased absorption < variable
question
which method to use for CVP analysis
Variable costing because categorized fixed and variable
question
variable costing is only affected by...
changes in unit sales not affected by the # of units produced when sales increased net income increase vice versa
question
absorption costing is affected by...
changes in unit sales AND units of production net income can be increased by producing more units even if those units are not sold
question
variable costing emphasizes...
the impact of the total fixed costs on profits absorption can create wrong pricing and product discontinuation decisions because FMOH seems to be variable with respect to # of units produced, but it is not
question
2 keys to building segmented income statements
1) contribution format to separate fixed from variable which enables CM calculation 2) traceable FC should be separated from common FC so you can calculate segment margin
question
common costs should never....
be allocated to the divisions/segments of a company
question
can fixed costs become common costs
YES. if they company is divided into smaller segments
question
common cost should not be randomly assigned to segments based on the thought that "someone has to cover the common cost" because
1) may make a profitable business segment appear unprofitable 2) allocating common FC forces managers to be held accountable for costs they cant control
question
can a common fixed cot be eliminated by dropping a segment