B2

Question 1

Cost-volume profit (CVP) analysis

Answer 1

Used by managers to forecast profits at different levels of sales and production volume. The point at which revenues equal total costs is called the breakeven point.

Question 2

General assumptions used under CVP analysis

Answer 2

1. All costs can be separated into either variable or fixed
2. Volume is the only relevant factor affecting cost
3. All costs behave in a linear fashion in relation to production volume.
4. Cost behaviors remain constant over the relevant range
5. Costs show greater variability over time.

Question 3

Contribution approach (direct costing)

Answer 3

Identifies each element of cost as fixed or variable

Question 4

Absorption approach

Answer 4

• Required for financial reporting under U.S. GAAP

- Does not segregate fixed and variable costs

Question 5

Contribution margin ratio

Answer 5

Contribution margin/revenue

Question 6

Contribution vs. absorption

Production is greater than sales

Answer 6

Absorption net income > variable net income

Question 7

Contribution vs. absorption

Sales greater than production

Answer 7

Absorption net income

Question 8

BEP in units

Answer 8

Total fixed costs/CM per unit

Question 9

BEP in dollars (2 ways)

Answer 9

1. BEP in units * SP/unit

2. Total fixed costs/CM ratio

Question 10

Contribution margin ratio

Answer 10

Contribution margin/sales

Question 11

Target costing

Answer 11

A technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume

Question 12

Marginal analysis

Answer 12

Used when analyzing business decisions such as the introduction of a new product or changes in output levels of existing products, acceptance or rejection of special orders, making or buying a product or service, selling or processing further, and adding or dropping a segment. Focuses on the relevant revenues and costs that are associated with a decision.

Question 13

Discretionary costs

Answer 13

Costs arising from periodic (usually annual) budgeting decisions by management to spend in areas not directly related to manufacturing; generally relevant

Question 14

Incremental costs

Answer 14

The additional costs incurred to produce an additional amount of the unit over the present output; relevant costs and include all variable costs and any avoidable fixed costs associated with the decision

Question 15

Opportunity costs

Answer 15

The cost of foregoing the next best alternative when making a decision; relevant costs

Question 16

Operational and tactical planning

Answer 16

The process of determining the specific objectives and means by which strategic plans will be achieved. They are short-term and cover periods up to 18 months

Question 17

Ideal standards

Answer 17

• Represent the costs that result from perfect efficiency and effectiveness in job performance. Generally not historical; they are forward-looking and no provisions is made for normal spoilage or downtime.
• Advantage: emphasis on continuous quality improvement
• Disadvantage: Demotivation of EEs by the use of unattainable standards

Question 18

Currently attainable standards

Answer 18

• Represent costs that result from work performed by EEs with appropriate training and experience but w/o extraordinary effort. Provisions are made for normal spoilage and downtime.
• Advantage: Fosters the perception that standards are reasonable
• Disadvantage: Required use of judgment and potential manipulation

Question 19

Master budget

Answer 19

Documents specific short term operating performance goals for a period, normally one year or less. Normally include an operating (non-financial) budget as well as a financial budget that outlines the sources of funds and detailed plans for their expenditure

Question 20

Operating budgets

Answer 20

Established to describe the resources needed and the manner in which those resources will be acquired
Includes: sales budgets, production budgets, selling and administrative budgets, and personnel budgets

Question 21

Financial budgets

Answer 21

Define the detailed sources and uses of funds to be used in operations
Includes: pro forma financial statements, cash budgets

Question 22

Capital budgets

Answer 22

Identify and allow management to evaluate the capital additions of the organization, often over a multi-year period. Financing is a significant component of the capital purchases budget. Capital budgets detail the planned expenditures for capital items. Capital budgets are highly dependent on the availability of cash or credit, and they generally involve long-term commitments by the organization.

Question 23

Flexible budget

Answer 23

A financial plan prepared in a manner that allows for adjustments for changes in production or sales and accurately reflects expected costs for the adjusted output.

Question 24

DM price variance

Answer 24

AQ purchased * (AP-SP)

Question 25

DM quantity (efficiency) variance

Answer 25

SP (AQ used-SQ allowed)

Question 26

DL rate variance

Answer 26

Actual hours worked (AR-SR)

Question 27

DL efficiency variance

Answer 27

SR (Actual hours worked-Standard hours allowed)

Question 28

To determine how the "difference" is calculated in variance analysis, the difference is always SAD

Answer 28

Standard-Actual=Difference

Question 29

Recognize the 4 main types of variances for raw materials and direct labor (PURE)

Answer 29

``` Price variance (for DM) Usage (quantity) variance (for DM) Rate variance (for DL) Efficiency variance (for DL) ```

Question 30

VOH rate (spending) variance formula

Answer 30

Actual hours * (AR-SR)

Question 31

VOH efficiency variance formula

Answer 31

SR*(Actual hours-standards hours allowed for actual production volume)

Question 32

FOH budget (spending) variance formula

Answer 32

Actual fixed OH-budgeted fixed OH

Question 33

FOH volume variance formula

Answer 33

Budgeted fixed OH-Standard FOH cost allocated to production

Question 34

VOH rate (spending) variance explanation

Answer 34

Tells managers whether more or less was spent on variable OH than expected. A favorable variance occurs when the standard rate exceeds the actual rate, which is beneficial to a company because it means that it paid less per labor hour than expected. An unfavorable variance occurs when the actual rate exceeds the standard rate, which means that the company paid more per labor hour than it expected to spend.

Question 35

VOH efficiency variance explanation

Answer 35

This variance is tied to the efficiency with which labor hours are utilized. Isolates the amount of total variable overhead variance that is due to using more or fewer direct labor hours than what was budgeted. A favorable variance results from using fewer labor hours than budgeted, and an unfavorable variance stems from using more labor hours than budgeted.

Question 36

FOH budget (spending) variance explanation

Answer 36

Companies budget an amount for FOH costs, and this variance focuses at a high level on whether more or less was spent than budgeted. A favorable variance occurs when actual FOH costs are less than the budgeted, and an unfavorable variance results from actual FOH costs exceeding the budgeted amount.

Question 37

FOH volume variance explanation

Answer 37

FOH costs are typically applied using a rate derived from budgeted fixed OH costs and expected volume. When the actual volume produced differs from the amount used to calculate the FOH application rate there will be a variance. A favorable variance occurs when volume is higher than anticipated, which implies that more units were produced using the same amount of fixed resources. An unfavorable variance occurs when volume is lower than anticipated, as fewer units were produced using a fixed amount of resources.

Question 38

Production volume variance (aka FOH budget variance)

Answer 38

(Actual production-budgeted production)* per unit standard FOH rate

Question 39

Sales price variance

Answer 39

(Actual SP/unit-budgeted SP/unit)* Actual units sold

Question 40

Sales volume variance

Answer 40

(Actual units sold-budgeted sales units)*Standard CM per unit

Question 41

Balanced scorecard critical success factors (FICA)

Answer 41

Financial Internal business processes Customer satisfaction Advancement of innovation and HR development

Question 42

Cost based pricing is associated with (3 things)

Answer 42

1. Price stability 2. Price justification 3. Foxed-cost recovery

Question 43

Contribution margin

Answer 43

Revenue-variable costs

Question 44

Margin of safety (in dollars)

Answer 44

Total sales (dollars)-Breakeven sales (dollars) = margin of safety

Question 45

The coefficient of correlation (r)

Answer 45

Measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y)

Question 46

The coefficient of determination (r^2)

Answer 46

The proportion of the total variation in the dependent variable (y) explained by the independent variable (x)

Question 47

Sensitivity analysis

Answer 47

The process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision