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Exam 30: Cost-Revenue Analysis for Decision Making

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Question 61

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Match the following descriptions with the appropriate term.

Premises

Responses

Costs that the segment manager can control

Absorption costing

Sales minus the variable cost of goods sold

Common costs

A cost that has been incurred and will not change as a result of a decision

Contribution margin

The accounting procedure whereby all manufacturing costs, including fixed costs, are included in the cost of goods manufactured

Controllable fixed costs

Potential earnings or benefits that are given up because a certain course of action is take

Differential cost

The difference in cost between one alternative and another

Direct costing

The manufacturing margin minus variable operating expenses

Manufacturing margin

Costs not directly traceable to a specific segment of a business

Marginal income

The accounting procedure whereby only variable costs are included in the cost of goods manufactured, and fixed manufacturing costs are written off as expenses in the period in which they are incurred

Opportunity cost

Revenues minus variable costs

Sunk cost

Premises

Costs that the segment manager can control

Sales minus the variable cost of goods sold

A cost that has been incurred and will not change as a result of a decision

The accounting procedure whereby all manufacturing costs, including fixed costs, are included in the cost of goods manufactured

Potential earnings or benefits that are given up because a certain course of action is take

The difference in cost between one alternative and another

The manufacturing margin minus variable operating expenses

Costs not directly traceable to a specific segment of a business

The accounting procedure whereby only variable costs are included in the cost of goods manufactured, and fixed manufacturing costs are written off as expenses in the period in which they are incurred

Revenues minus variable costs

Responses

Absorption costing

Common costs

Contribution margin

Controllable fixed costs

Differential cost

Direct costing

Manufacturing margin

Marginal income

Opportunity cost

Sunk cost

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Correct Answer

Premises

Responses

Costs that the segment manager can control

Sales minus the variable cost of goods sold

A cost that has been incurred and will not change as a result of a decision

The accounting procedure whereby all manufacturing costs, including fixed costs, are included in the cost of goods manufactured

Potential earnings or benefits that are given up because a certain course of action is take

The difference in cost between one alternative and another

The manufacturing margin minus variable operating expenses

Costs not directly traceable to a specific segment of a business

The accounting procedure whereby only variable costs are included in the cost of goods manufactured, and fixed manufacturing costs are written off as expenses in the period in which they are incurred

Revenues minus variable costs

Premises

Costs that the segment manager can control

Sales minus the variable cost of goods sold

A cost that has been incurred and will not change as a result of a decision

The accounting procedure whereby all manufacturing costs, including fixed costs, are included in the cost of goods manufactured

Potential earnings or benefits that are given up because a certain course of action is take

The difference in cost between one alternative and another

The manufacturing margin minus variable operating expenses

Costs not directly traceable to a specific segment of a business

The accounting procedure whereby only variable costs are included in the cost of goods manufactured, and fixed manufacturing costs are written off as expenses in the period in which they are incurred

Revenues minus variable costs

Responses

Question 62

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The contribution margin income statement with segment margin information assists management in making sound decisions regarding whether to drop, keep or add a segment.

A) True
B) False

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verified

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Question 63

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When inventories increase, the direct costing income statement will report a lower net income than the net income reported under absorption costing.

Which of the following is the first step in the decision-making process?

Under the contribution margin approach, common costs are deducted from the total of all segment contributions to determine the company's profit.

In its first year of operations, a company has sales of $158,000, ending finished goods inventory of $11,500, variable manufacturing costs of $49,000, and fixed manufacturing costs of $31,000 for the year. The company pays 9% commission to its sales force and has fixed selling and administrative expenses of $27,000 annually. The company has no other variable expenses. Assuming the company uses direct costing, the net income for the year is

Which of the following is not relevant in decision making?

Costmore Manufacturing has provided the following operating results for its first year operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 0 \\\text { Units produced (no work in process) } & 22,000 \\\text { Units sold } & 18,000 \\\text { Units in ending inventory of finished goods } & 4,000\\\text { Sales price }&\$55\text { per unit }\\\text { Variable manufacturing costs }&\$25\text { per unit }\\\text { manufactured Variable selling and }\text { administrative expenses }&\$ 7 \text { per unit }\\\text { sold Fixed manufacturing }\text { costs for the year } & \$ 110,000 \\\text { Fixed selling and administrative expenses for the year } & \$ 124,000\end{array}$ - Using the absorption costing method, the value of ending inventory of finished goods is:

If a segment of a business is expected to produce an annual contribution margin of $30,000 but is also expected to incur controllable fixed costs of about $40,000 annually, that segment should probably be discontinued.

Fixed costs are associated with the capacity to produce goods, not to the actual goods produced.

In managerial decisions, nonmanufacturing costs can be ignored.

Timkon Manufacturing has provided the following operating results for its recent operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 4,500 \\\text { Units produced (no work in process) } & 10,000 \\\text { Units sold } & 12,500 \\\text { Units in ending inventory of finished goods } & 2,000\\\text { Sales price }&\$ 50 \text { per unit }\\\text { Variable manufacturing costs }&\$ 20 \text { per unit }\\\text { manufactured Variable selling expenses }&\$ 2 \text { per unit sold }\\\text { Variable administrative expenses } & \$ 1 \text { per unit sold Fixed manufacturing } \\\text { costs for the year } & \$ 100,000 \\\text { Fixed selling expenses for the year } & \$ 52,000 \\\text { Fixed administrative expenses for the year } & \$ 84,000\end{array}$ - Using the absorption method, cost of goods manufactured for the year is:

Manufacturing margin less the sum of variable manufacturing overhead and variable selling and administrative expenses equals marginal income.

When the balance in ending finished goods inventory increases, net income under absorption costing

Income statements prepared on an absorption-costing basis are usually more useful for internal decision making than income statements prepared on a direct costing basis.

Which of the following costs can be found in a firm's accounting records?

The increase in a cost from one alternative to another is called a(n)---------------cost.

Which inventory costing system is required by GAAP for financial reporting purposes?

Timkon Manufacturing has provided the following operating results for its recent operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 4,500 \\\text { Units produced (no work in process) } & 10,000 \\\text { Units sold } & 12,500 \\\text { Units in ending inventory of finished goods } & 2,000\\\text { Sales price }&\$ 50 \text { per unit }\\\text { Variable manufacturing costs }&\$ 20 \text { per unit }\\\text { manufactured Variable selling expenses }&\$ 2 \text { per unit sold }\\\text { Variable administrative expenses } & \$ 1 \text { per unit sold Fixed manufacturing } \\\text { costs for the year } & \$ 100,000 \\\text { Fixed selling expenses for the year } & \$ 52,000 \\\text { Fixed administrative expenses for the year } & \$ 84,000\end{array}$ - Assuming beginning inventory cost per unit is not different than ending inventory cost per unit, the value of the ending inventory under direct costing is:

The data given below is taken from the budgeted income statement of the Arrow Corporation for 2019. It shows the projected net income or loss for each of the firm's three products. Management is concerned about the budgeted loss for Product C and wants to discontinue it. Prepare an analysis indicating the effects of discontinuing Product C. Based on the analysis, indicate the decision that should be made. $\begin{array}{lllll}\text { Mfg. Overhead } & 3,500&8,000&3,000&14,500 \\\text { Total } & \$ 15,500&\$35,000&\$13,000&\$63,000\\\text { Gross Profit on Sales } & \$ 19,500 & \$ 55,000 & \$ 7,000 & \$ 81,500 \\\text { Operating Expenses } & 13,000 & 24,000 & 10,000 & 47,000\\\text { Net Income or (Loss) }&\$6,500&\$31,0100&\$(3,000)&\$34,500\end{array}$ Additional information: (a.)Materials and labor are variable costs. (b.)Total manufacturing overhead is applied at 50 percent of the direct labor costs. (c.)Variable overhead is 10 percent of the direct labor costs. (d.)Fixed overhead totals $11,600 a year. (e.)Operating expenses include variable costs at 20 percent of sales dollars. (f.)Fixed operating expenses total $18,000. (g.)Fixed overhead costs and fixed operating expenses are expected to continue if Product C is eliminated.