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Managerial accounting > Chapter 5 and 6 > Flashcards

Chapter 5 and 6 Flashcards

1
Q

In order to simplify CVP (cost-volume-profit) calculations what is assumed to stay constant?

A

Selling price

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2
Q

How does CVP allow companies to identify changes in profit?

A

Changes in volume, selling price, and product mix

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3
Q

Once all fixed expenses have been paid for, what does the CM ratio define the portion of each sales dollar contributing to?

A

Profits

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4
Q

Does the higher the margin of safety mean the lower the risk of incurring a loss?

A

Yes

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5
Q

What is the contribution margin as a percentage of sales referred to as?

A

Contribution margin (CM) ratio

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6
Q

If companies have the same revenue and expenses but different fixed and variable costs, will the company with the more fixed costs have a higher operating leverage?

A

Yes

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7
Q

State 2 assumptions of CVP analysis?

A

In multi-product companies, the sales mix is constant, and costs are linear and can be accurately divided into variable and fixed elements

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8
Q

When is simple CVP analysis not valid?

A

Outside the relevant range

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9
Q

Are costs separated into variable and fixed categories when using the contribution approach?

A

Yes

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10
Q

Will a company with a higher operating leverage experience a greater fall in profits if sales were to decrease?

A

Yes

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11
Q

What is the operating leverage?

A

A measure of how sensitive net operating income is to a given percentage change in unit sales

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12
Q

What is the conversion to get from margin of safety in dollars to margin of safety in terms of number of units sold?

A

Divide by sales price per unit

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13
Q

What is target profit analysis?

A

Estimating the sales volume required to earn a given amount of net income

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14
Q

What would you set the target profit to convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even?

A

0

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15
Q

How can the total mixed cost line be expressed as an equation and what does it mean?

A

Y (total mixed costs) = a (the total fixed cost) + b (the variable cost per unit) x X (the level of activity)

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16
Q

When the CM ratio is computed using total amounts does it equal the CM ratio derived when computed on a per unit basis?

A

Yes

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17
Q

What is true when answering what-if questions?

A

The projected sales may be influenced by changes in unit sales and/or changes in selling price

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18
Q

What is true when performing what-if analysis?

A

If projected increase in contribution margin exceeds any projected increase in total fixed expenses, then projected profit would increase too

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19
Q

Does a CVP graph and profit graph both depict the break-even point?

A

Yes

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20
Q

What is true concerning multi-product break-even analysis?

A

Assume a constant sales mix

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21
Q

Does the contribution margin income statement demonstrate the effect of changes in selling price, cost, or volume on profit?

A

Yes

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22
Q

In target profit analysis, does the sales volume need to be estimated to achieve a specific target profit?

A

Yes

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23
Q

By companies trying to generally compensate salespeople by paying them commission, can commissions based on sales dollars lead to lower profits in a company?

A

Yes

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24
Q

How can the relationship among revenue, cost, profit, and volume be expressed?

A

Graphically by preparing a CVP graph

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25
Q

Is sales mix the relative proportion in which a company’s products are sold?

A

Yes

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26
Q

Does reported net income on income statements prepared under variable and absorption costing differ?

A

Yes

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27
Q

Do both income statements prepared under absorption and variable costing include product and period costs?

A

Yes

28
Q

What two things should be considered when calculating the profit impact of discontinuing a segment?

A

The segment’s contribution margin, and the segment’s traceable fixed costs

29
Q

Does variable costing emphasise the impact of fixed costs on profit?

A

Yes

30
Q

Does absorption costing make fixed costs appear variable?

A

Yes

31
Q

Whilst using which income statement is CVP analysis enabled?

A

Variable

32
Q

Can absorption costing lead to the omission of segment costs?

A

Yes

33
Q

What type of format are variable costing income statements based upon?

A

Contribution

34
Q

What are 2 common mistakes made by companies when assigning costs to segments?

A

Omit costs that should be included, inappropriately assigning traceable fixed costs

35
Q

Should costs traced directly to a segment be allocated to other segments?

A

No

36
Q

Can absorption costing make managers mistakenly believe that fixed overhead costs increase as number of units produced increases?

A

Yes

37
Q

When will the profit predicted by CVP analysis only work?

A

When using variable costing

38
Q

What two things can using absorption costing for segmented income statements lead to?

A

Under-costing of segments, and omission of upstream and downstream costs

39
Q

What type of costing are internal and external income statements usually prepared by?

A

Absorption costing, and variable costing respectively

40
Q

What is one example of a traceable fixed cost for General Motors’ Corvette Division?

A

Depreciation on equipment used to manufacture Corvettes

41
Q

What is another for term for marginal, and direct costing?

A

Variable

42
Q

Under absorption costing what costs do product costs consist of?

A

Both variable and fixed manufacturing costs

43
Q

When is fixed manufacturing overhead costs included as part of work in process inventory?

A

Under absorption costing only

44
Q

When do financial statement users need to be aware of changes in inventory levels?

A

When using absorption costing

45
Q

Why can absorption costing lead to the omission of segment costs?

A

Because non-manufacturing costs are not included as costs of a product

46
Q

Can segmented income statements be prepared for activities at many levels in a company?

A

Yes

47
Q

What format are variable costing income statements based upon?

A

Contribution

48
Q

Why is a traceable fixed cost incurred?

A

Because of the existence of the segment

49
Q

Which manufacturing costs does variable costing treat as product costs?

A

Only variable

50
Q

Does absorption costing treat fixed manufacturing overhead as a product cost?

A

Yes

51
Q

Why is a fixed overhead treated like a variable cost under absorption costing?

A

Because a portion of the total cost is allocated to each unit produced

52
Q

Under absorption costing what do product costs consist of?

A

Both variable and fixed manufacturing costs

53
Q

What two things occur when preparing a segment margin income statement?

A

Traceable fixed expenses are deducted from the contribution margin, and cost of goods sold consists of only variable manufacturing costs

54
Q

When number of units produced is greater than that sold, is variable costing net operating income less than the absorption costing net operating income?

A

Yes

55
Q

State 3 costs that are treated as period costs when an income statement is prepared using variable costing approach?

A

Fixed manufacturing overhead, fixed selling and administrative expenses, and variable selling and administrative expenses

56
Q

State one cost that is not a unit product cost under variable costing?

A

Variable selling and administrative expense

57
Q

Do absorption costing income statements compute a gross margin?

A

Yes

58
Q

For variable costs per unit, does the number of units produced and total fixed costs remain unchanged?

A

Yes

59
Q

What happens to inventory and the relation between variable and absorption incomes when units produced > units sold?

A

Inventory increases, and absorption income > variable income

60
Q

Is variable costing income statement affected by changes in unit sales, whereas absorption costing is influenced by changes in unit sales and production?

A

Yes

61
Q

What format should be used for segmented income statements?

A

Contribution format

62
Q

How do common fixed costs arise? Would they disappear if any particular segment were eliminated?

A

Through the overall operation of the company. No.

63
Q

Is the segment margin the best gauge of the long-run profitability of a segment?

A

Yes

64
Q

Can common fixed expenses be eliminated by dropping one of the segments?

A

Yes

65
Q
A

Managerial accounting (4 decks)

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