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Accounting 249 Exam 2
Terms in this set (87)
How a cost reacts to changes in the level of activity
The relative proportion of each type of cost in an organization
cost that varies in direct proportion to changes in the level of activity
For a cost to be variable, it must be...
variable with respect to something
Also called "Cost Driver", a measure of whatever causes the variable cost
Variable cost =
variable cost per unit x number of units
fixed regardless of changes in the level of activity (fixed with respect to the activity base)
Fixed cost per unit decreases as...
the number of units increases
Fixed costs can be ________ or _________
committed or discretionary
Committed fixed costs...
can't be significantly reduced without making fundamental changes (Ex: CEO salary)
Discretionary fixed costs...
Can be cut without making fundamental changes (Ex: Advertising)
The range of activity within which the assumption that cost behavior is strictly linear is valid (if you double your volume, you might need new equipment)
Costs that display a constant level of cost for a range of output, and then jump to a higher level of cost at some point
Mixed costs contain both....
variable and fixed cost elements
Mixed cost =
Fixed cost + (variable cost per unit * number of units)
In the total cost equation, fixed cost is the...
In the total cost equation, variable cost per unit is the...
Variable cost per unit equation (with high-low method) =
(cost at high level of activity - cost at low level of activity) / (high activity level - low activity level)
When using the high low method, look for the highest and lowest...
activity level, then use that cost
What is a better method than high/low that results in a better graph if there are outliers?
Least squares regression
Units price x units sold
Unit product cost x units sold
Sales - COGS =
Operating expenses =
All selling and administrative costs
What does the traditional income statement look like?
- Operating Expense
Net Operating Income
The traditional income statement groups costs by...
their function (period v.s. product)
Contribution Margin Income Statement
- Variable costs
- Fixed Costs
Net Operating Income
Variable costs =
Variable cost per unit x units sold
The contribution margin income statement groups cost by...
their behavior (variable v.s. fixed)
Contribution margin is the...
amount of revenues left over after variable costs have been covered that can contribute towards fixed costs and profits
Cost-Volume-Profit analysis helps managers...
make decisions, it helps estimate how profits will be affected by selling prices, sales volume, unit variable costs, total fixed costs, and a mix of products sold
In CVP analysis, we simplify calculations by assuming that selling price is _________, costs are _______, and the mix of products sold is ________
constant, linear, constant
Break-Even point is where...
Total revenue and total expense lines intersect
Total expenses =
(sales volume x unit variable cost) + total fixed expenses
CM Ratio =
Contribution margin / Sales
CM Ratio (in terms of units) =
Unit contribution margin / Unit price
Change in contribution margin =
CM Ratio x change in sales
CM Ratio x Sales - Fixed Expenses
Variable expense Ratio =
Variable expenses / Sales
The break even point is the level of sales at which the company's profit is...
Unit sales to break even =
Fixed expense / Unit CM
Dollar sales to break even =
Fixed expenses / CM Ratio
Unit sales to attain target profit =
(Target profit + Fixed expenses) / Unit CM
Dollar sales to attain target profit =
(Target profit + Fixed expenses) / CM Ratio
The margin of safety is the...
excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. This helps managers to assess risk
Margin of safety in dollars =
Total budgeted (or actual) sales - Break-even sales
Margin of safety percentage =
Margin of safety in dollars / Total budgeted (or actual) sales in dollars
Cost structure refers to the...
relative proportion of fixed and variable costs in an organization
Operating leverage is a measure of...
how sensitive net operating income is to a given percentage change in dollar sales
Operating leverage is not...
a constant, it is calculated at a particular level of sales
If operating leverage is high, it means...
a small percentage increase in sales can produce a much larger percentage increase in net operating income
Degree of operating leverage =
Contribution margin / Net operating income
Percentage change in net operating income =
Degree of operating leverage x percentage change in sales
Absorption costing treats...
ALL manufacturing costs as product costs
Variable costing on treats...
VARIABLE manufacturing costs as product costs
The key difference between absorption and variable costing is the treatment of...
In absorption costing, fixed overhead is a...
In variable costing, fixed overhead is a..
In absorption costing, fixed overhead will first...
enter inventories, and it won't hit the income statement until goods are sold
In variable costing, all fixed overhead is...
In absorption costing, we use a _____________ income statement
In variable costing, we use a ________________ income statement
Absorption costing product cost =
DM + DL + VMOH + FMOH
Variable costing product cost =
DM + DL + VMOH
If # produced > # sold, then...
absorption NI > variable NI
If # sold > # produced, then...
variable NI > absorption NI
If you do not sell every unit you produced, then some fixed MOH is in your...
ending inventory and NOT in your COGS
Manufacturing overhead deferred in (released from) inventory =
FMOH in Ending Inventory - FMOH in beginning inventory
If produced > sold...
deferred FMOH (+) so NOI abs > NOI var
If produced < sold...
released FMOH (-) so NOI abs < NOI var
Why do we use variable costing?
- It enables CVP analysis
- It easily explains changes in net income
- It supports decision making
Any part or activity of an organization about which managers seek cost, revenue, or profit data
Traceable fixed cost
A fixed cost that is incurred because of the existence of the segment. If the segment were eliminated, the fixed cost would also be eliminated
(think about two factories for an iPad and iPhone, if you get rid of one factory, you don't have to pay for it)
Common fixed cost
A fixed cost that support the operations of more than one segment. If any given segment were eliminated, the fixed cost would remain (think of another room in a factory producing a different product, you can't just not pay for the factory if you aren't using one room, the cost will still incur)
Segment margin =
Segment's contribution margin - the segment's traceable fixed costs
Break-even points for all of the segments will NOT...
add up to the break-even point for the company as a whole
It is NOT a good idea to allocate __________ expenses to segments
Activity-based costing (ABC) is a costing method based on
an organization's activities
In activity based costing, non manufacturing and manufacturing costs may be assigned to products on a
cause and effect basis
In activity based costing, manufacturing costs may be excluded from...
In activity based costing, many overhead cost pools are used, and these cost pools are allocated based on
measures of activity
An activity is any event that...
causes the consumption of overhead resources
An activity cost pool is a...
"bucket" in which costs are accumulated that relate to a single activity measure
An activity measure is an...
allocation base (also called a cost driver)
Organization sustaining activities
carried out regardless of which specific customers, products, batches, or units exist
The 5 steps of implementing ABC
1. Define activities, activity cost pools, and activity measures (given to us)
2. Assign overhead costs to activity cost pools
3. Calculate activity rates
4. Assign overhead costs to cost objects using the activity rates and activity measures
5. Prepare management reports
Activity rate =
Total activity cost / Total activity measure (cost driver)
Recommended textbook explanations
Fundamentals of Financial Management, Concise Edition (with Thomson ONE)
Eugene F. Brigham, Joel F Houston
Horngren's Cost Accounting
Charles T. Horngren, Srikant M. Datar
Bundle: Intermediate Accounting 16e Binder Ready Version + WileyPLUS Access Code
Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
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