chapter 6: CM income statement

Question 1

what are product costs for a merchandising business

Answer 1

inventory costs (COGS): total inventory costs

Question 2

what are period costs for a merchandising business

Answer 2

operating costs (OPEX)

Question 3

what are product costs for a service business

Answer 3

Cost of sales (COS):
Costs critical to delivering the service

Question 4

what are product costs for a manufacturing business

Answer 4

Manufacturing costs (COGS):
Direct Labour
Direct Materials
Manufacturing Overhead

Question 4

what are period costs for a manufacturing business

Answer 4

Non-manufacturing costs (OPEX)

Question 5

what are period costs for a service business

Answer 5

Operating costs (OPEX)

Question 6

which of merchandising product costs are variable and fixed

Answer 6

Inventory costs (COGS):
Total inventory costs - variable

Question 7

which of merchandising period costs are variable and fixed

Answer 7

Operating costs (OPEX)
Variable OPEX
Fixed OPEX

Question 8

which of manufacturing product costs are variable and fixed

Answer 8

Manufacturing costs (COGS):
Direct Labour - variable
Direct Materials - variable
Manufacturing Overhead
Variable manufacturing overhead
Fixed manufacturing overhead

Question 9

which of manufacturing period costs are variable and fixed

Answer 9

Non-manufacturing costs (OPEX)
Variable OPEX
Fixed OPEX

Question 10

which of service product costs are variable and fixed

Answer 10

Cost of sales (COS):
Variable COS
Fixed COS

Question 11

which of service period costs are variable and fixed

Answer 11

Operating costs (OPEX)
Variable OPEX
Fixed OPEX

Question 12

what should be the same in a GM and a CM income statement

Answer 12

total operating expenses
operating income line (EBIT)

Question 13

what is the formula for variable and fixed costs

Answer 13

Total operating costs = variable costs + fixed costs

Question 14

what are variable costs

Answer 14

Total costs varies based on amount sold, but cost per good does not change
All variable costs have this type of behaviour

Question 15

what is mixed costs

Answer 15

• A combination of variable and fixed costs
• Total mixed cost is dependent on the proportion of variable to fixed cost
• Per unit mixed cost is also dependent on the proportion of variable to fixed cost

Question 15

what are fixed costs

Answer 15

• Costs that remain constant, in total, regardless of the amount of goods/services produced/sold
• Total costs do not change (within relevant range), but affect the fixed cost per unit

Question 16

what is relevant range

Answer 16

• The span of activity within which assumptions about cost behaviour hold true
• fixed cost will remain the same for only a certain volume of items
• At some point, the fixed costs will have to increase to support the increasing level of activity

Question 17

what formula can mixed cost behaviour be expressed as

Answer 17

y = mx + b
y = total mixed cost
m = variable cost per unit of activity / slope of the line
x = units of activity
b = total fixed cost / vertical intercept
Formula for the cost model

Question 18

what is the high-low method

Answer 18

• A method to determine how much of a mixed cost is variable vs. fixed, given limited data points
• Separates fixed and variable cost components in a mixed cost by comparing the total cost at the highest level of activity to the total cost at the lowest level of activity

Question 19

what are the high-low method steps

Answer 19

• Among the data points available, identify the periods of highest and lowest levels of activity
• Using the levels, calculate variable cost per unit of activity (Δ cost ÷ Δ activity)
• Choose either level of activity (highest or lowest) and plug the information in the formula to solve for “b” (fixed costs)
• Present the formula for the mixed cost model

Question 20

what is a contribution margin

Answer 20

• The difference between revenue and variable costs
• “Contribution” represents the amount of revenue that contributes to the coverage of fixed costs
• Leftover money after covering fixed costs is operating income

Question 21

what is the formula for the CM income statement

Answer 21

Revenue - Variable Expenses = Contribution Margin (CM) - Fixed Expenses = Earnings Before Interest & Taxes (EBIT)/Operating Income - Interest & Taxes = Net Income/Loss

Question 22

what is contribution margin ratio

Answer 22

• Contribution margin / sales
• How much is left over to contribute to the coverage of fixed costs
• If the ratio is 15%, for every $1 of sales, 15 cents is left over to cover fixed costs

Question 23

who is the CM income statement for

Answer 23

used only by internal stakeholders

Question 24

what is cogs

Answer 24

• An expense which is used to recognize the cost of inventory when it is sold to a customer
• Includes all costs to acquire the goods being sold (ex. Freight, overhead, shipping, discounts, etc.)

Question 25

what is cogs like for a merchandiser

Answer 25

• all COGS are variable costs, but not all variable costs are COGS
  Ex. sales commissions are variable, but they’re not COGS
• The commissions would be included on the CM income statement as part of the variable expenses line item

Question 26

what is cogs like for a manufacturer

Answer 26

• manufacturing overhead is a part of COGS
  Includes both fixed and variable costs
  Ex. factory property taxes are fixed costs of overhead & utilities are variable costs of overhead

Question 27

how to make a CM income statement from reconstructing a GM income statement

Answer 27

• Starting with COGS - determine which costs are fixed vs variable
• Then look at operating expenses - determine which costs are fixed vs variable
• Reallocate and ensure operating income hasn’t changed

Question 28

are marketing costs fixed or variable

Answer 28

fixed

Question 29

are factory/machinery insurance expenses fixed or variable

Answer 29

fixed

Question 30

are accountant salaries fixed or variable

Answer 30

fixed

Question 31

are shipping charges fixed or variable

Answer 31

variable, sometimes can be fixed (depends)