ACCCOB Quiz 2

• In Account Analysis, each account is classified as either variable or fixed based on the analyst's knowledge of how the account behaves
• The engineering approach classifies costs based upon an industrial engineer's evaluation of production methods, and material, labor, and overhead requirements
• true or false? A cost formula may not be valid outside the relevant range of activity

  true
• True or false? the planning horizons for committed fixed costs and discretionary fixed costs are generally the same

  False (committed-managers have no control over the cost, whereas discretionary managers has)
• True or false? the high low method is generally less accurate than the least squares regression method for analyzing the behavior of mixed costs

  True
• True or false? the contribution approach to the income statement classifies costs by behavior rather than by function

  True
• True or false? On an income statement prepared by the traditional approach, costs are organized and presented according to function

  True
• True or false? the profit in cost-volume-profit equations is the same as the net operating income on a contribution income statement

  True
• True or false? at the break-even point, variable expenses and fixed expenses are equal. Contribution margin = to fixed costs

  False
• True or false? all the other things the same, a decrease in variable expense per unit will reduce the break-even point

  True
• True or false? If the sales mix changes, the average contribution margin ratio is likely to change as well

  True
• Which costs will change with a decrease in activity within the relevant range?

  A.Total Fixed costs and total variable cost

  B. unit fixed costs and total variable cost

  C. unit variable cost and unit fixed cost

  D. unit fixed cost and total fixed cost

  B.
• the linear equation Y=a+bX is often used to express cost formulas. In this equation:

  A.The b term represents variable cost per unit of activity

  B. The a term represents variable cost in total

  C. The X term represents total cost

  D. The Y term represents total fixed cost

  A.
• An example of a discretionary fixed cost is

  A.Insurance

  B. taxes on real estate

  C. management training

  D. depreciation of buildings and equipment

  C.
• Once the break-even point is reached

  A.The total contribution margin changes from negative to positive

  B. Net operating income will inc. by the unit contribution margin for each additional item sold

  C. Variable expenses will remain constant in total

  D. The contribution margin ratio begins to decrease =1

  B.
• To obtain the break-even point in terms of peso sales, total fixed expenses are divided by which of the following?

  A.Variable expense per unit

  B. Variable expense per unit / selling price per unit

  C. Fixed expense per unit

  D. (Selling price per unit - Variable expense per unit)/Selling price per unit (Contribution margin ratio)

  D.
• The ratio of fixed expenses to the unit contribution margin is the

  A.Break-even point in sales

  B. Profit margin

  C. Contribution margin ratio

  D. Margin of safety

  A.
• Edmonco Company produced and sold 45,000 units of a single product last year with the following results:

  Sales revenue .... $1,350,000

  Manufacturing costs:

  Variable .... 585,000

  Fixed .... 270,000

  Selling costs:

  Variable .... 40,500

  Fixed .... 54,000

  Administrative Costs:

  Variable .... 184,500

  Fixed .... 108,000

  Edmonco's operating leverage factor was:

  A.4

  B. 5

  C. 6

  D. 7

  E. 8

  B. 5

  A) answer
• break even point is the level of sales at which profit is zero
• contribution approach is an income statement that separates costs into variable and fixed categories, first deducting all variable expenses from sales to obtain the contribution margin
• contribution margin is the amount remaining from sales after all variable expenses have been deducted
• Contribution margin ratio divides contribution margin by sales
• CVP graph is a graphical

  representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.
• Degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income.
• Incremental analysis is an analytical approach focusing only on the costs and revenues that change as a result of a decision.
• Margin of safety is the excess of budgeted or actual dollar sales over the break-even dollar sales.
• Operating leverage is a measure of how sensitive net operating income is to a given percentage change in unit sales.
• Sales mix is the relative proportions in which a company's products are sold. Sales mix expresses the sales of each product as a percentage of total sales.
• Target profit analysis estimates the level of sales needed to achieve a desired target profit.
• Variable expense ratio is computed by dividing variable expenses by sales.
• CVP Analysis helps managers decide what to offer such as products, services, price, and marketing strategies
• Name 3 CVP Assumptions

  1. The selling price is constant
  2. costs are linear, divided into variable and fixed
  3. In multi-product companies, the mix of products sold remains constant
• The contribution approach income statement is divided into variable and fixed
• The contribution margin is the amount remaining from sales after all variable expenses have been deducted
• the variable expense ratio expresses variable expenses as a percentage of sales
• the contribution margin ratio express contribution margin as a percentage of sales
• Operating leverage is a measure of how sensitive net operating income is to a given percentage change in unit sales
• High operating leverage means that a small increase in unit sales can produce a much larger percentage increase in net operating income
• Break-even analysis is the level of sales at which profit is zero
• Margin of safety is the amount sales can drop before losses are incurred