Exam 2: Chapters 1, 2, 3

Question 1

Cost

Answer 1

Any expenditure or resource that we use in order to achieve an objective

Question 2

Actual cost

Answer 2

Historical cost, objective, verifiable, not a projection and can prove that it happened because we have evidence of cost through an invoice or receipt

Question 3

Cost object

Answer 3

Anything for which we desire a measure of cost

Question 4

Two costing system stages

Answer 4

Accumulation and assignment

Question 5

Two parts of assignment

Answer 5

Tracing and allocation

Question 6

Accumulation

Answer 6

Collect costs into natural categories

Question 7

Tracing

Answer 7

Tracing the cost directly to the cost object

Question 8

Allocation

Answer 8

Figure out a reasonable method to split a cost among the cost objects that use that resource

Question 9

Trace or allocate: direct cost

Answer 9

Trace

Question 10

Direct costs

Answer 10

Trace, more exact but might be more expensive

Question 11

Trace or allocate: indirect costs

Answer 11

Allocate

Question 12

Indirect costs

Answer 12

Allocate, less exact but may be cheaper and easier

Question 13

Three factors affecting cost classification

Answer 13

More technology (trace), materiality or expensiveness (trace), fewer products or cost objects (trace)

Question 14

Variable costs

Answer 14

Stay at a constant dollar amount per unit produced within the relevant range of output, changes total dollars paid out based on number of units produced

Question 15

Fixed costs

Answer 15

Total dollars paid out stay constant within the relevant range, dollar amount per unit produced changes based on number of units produced

Question 16

Relevant range

Answer 16

Range of output in which the variable cost and fixed cost assumptions remain true

Question 17

Service companies

Answer 17

Revenue - operating expenses = net income

Question 18

Merchandising companies

Answer 18

Revenue - COGS = gross profit - operating expenses = net income

Question 19

Manufacturing companies

Answer 19

Revenue - COGS = gross profit - operating expenses = net income

Question 20

3 different types of inventory

Answer 20

Direct materials, work-in-process, finished goods

Question 21

Direct materials

Answer 21

“Ingredient” that becomes part of a product and leaves with the product when the product is sold

Question 22

Work-in-process

Answer 22

Unfinished product

Question 23

Finished goods

Answer 23

Product ready to ship to customer

Question 24

Three manufacturing cost classifications

Answer 24

Direct materials costs, direct manufacturing labor, indirect manufacturing costs (manufacturing overhead)

Question 25

Direct materials costs

Answer 25

Become part of the finished product that is sold to customers, “dm”

Question 26

Direct manufacturing labor

Answer 26

Converts direct materials into finished goods, “dl”

Question 27

Indirect manufacturing costs (manufacturing overhead)

Answer 27

All other costs in the factory that are not dm or do, “moh”

Question 28

Inventoriable costs

Answer 28

Factory costs, dm + dl + moh

Question 29

Period costs

Answer 29

“Operating expenses:” selling expenses and general & administrative expenses: accounting, R&D, HR

Question 30

Prime costs

Answer 30

Direct manufacturing costs - dm + dl

Question 31

Conversion costs

Answer 31

Dl + moh, all costs necessary to “convert” dm into finished goods (fg)

Question 32

Product costs

Answer 32

Factory costs, dm + dl + moh

Question 33

Contribution margin income statement

Answer 33

Groups costs by behavior

Question 34

Financial reporting income statement

Answer 34

Groups costs by function/location

Question 35

How does contribution margin differ from gross profit?

Answer 35

GP- profit from selling products, CM- profit available to cover fixed costs

Question 36

Six foundational assumptions in CVP

Answer 36

-changes in production/sales volume are the sole cause for cost and revenue changes -total costs consist of fixed costs and variable costs -revenue and costs behave and can be graphed as a linear function (a straight line) -selling price, variable costs per unit, and fixed costs are all known and constant -in many cases only a single product will be analyzed. If multiple products are studied, their relative sales proportions are known and constant -the time value of money (interest) is ignored

Question 37

Basic CVP formula

Answer 37

Revenue - variable costs - fixed costs = operating income

Question 38

Two supporting CVP formulas

Answer 38

Revenue = selling price x quantity sold Variable costs = variable cost per unit x quantity sold

Question 39

Contribution margin

Answer 39

Revenue - VC

Question 40

Contribution margin per unit

Answer 40

USP - UVC

Question 41

Contribution margin percentage (ratio)

Answer 41

CM/sales or UCM/USP

Question 42

Broken down cost-volume-profit equation

Answer 42

(Selling price x sales quantity) - (unit variable costs x sales quantity) - fixed costs = operating income

Question 43

Break even point definition

Answer 43

No profit or loss at the given sales level

Question 44

Break even point

Answer 44

Sales - variable costs - fixed costs = 0

Question 45

Break even number of units

Answer 45

Fixed costs / contribution margin per unit, round up

Question 46

Break even revenue

Answer 46

Fixed costs / contribution margin percentage

Question 47

Quantity of units required to be sold

Answer 47

(Fixed costs + operating income) / contribution margin per unit

Question 48

After-tax profit

Answer 48

Net income = operating income x (1-tax rate)

Question 49

Operating income

Answer 49

Net income / (1-tax rate)

Question 50

Margin of safety definition

Answer 50

Indicator of risk, measures the distance between budgeted sales and break even sales

Question 51

MOS

Answer 51

Budgeted sales - BE sales

Question 52

MOS ratio

Answer 52

MOS / budgeted sales

Question 53

Operating leverage definition

Answer 53

The effect that fixed costs have on changes in operating income as changes occur in units sold, expressed as changes in contribution margin

Question 54

Operating leverage

Answer 54

Contribution margin/operating income (Sales-VC)/(sales-VC-FC)