MT 2

Question 1

Definition of Contribution Margin

Answer 1

Revenue that remains after variable costs have been deducted

Question 2

Equation for Contribution Margin per unit

Answer 2

CM/unit = Unit selling price - Unit variable cost

Question 3

Equation for Contribution Margin Ratio

Answer 3

CMR=CM/unit / Unit Selling Price

Question 4

Sales Equation and how to find break even using it

Answer 4

Sales = VC*Q+FC+ Operating Income
To find BEP set operating income to 0

Question 5

BEP in units equation

Answer 5

BEP in U = FC/CM

Question 6

BEP in Dollars equation

Answer 6

BEP$ = FC/CMR

Question 7

Required Sales Equation

Answer 7

Required Sales = VC + FC + Target operating income

Question 8

Required Sales in Units Equation

Answer 8

= (FC+ Target Op Income) / CM/Unit

Question 9

Required Sales in Dollars Equation

Answer 9

= (FC + Target Op Income) / CMR

Question 10

Margin of safety definition

Answer 10

The difference between actual or expected sales and sales at the break even point

Question 11

Margin of Safety Equation ($ and ratio)

Answer 11

$=Sales - BE sales
Ratio=Margin of Safety $ / Sales

Question 12

What is the BEP mathematical Equation

Answer 12

PQ=VQ+FC

Question 13

Weighted Average unit contribution margin

Answer 13

CM/U * Sales Mix % + CM/U * Sales Mix %

Question 14

BEP using Weighted Average CMR

Answer 14

=FC/ WA-CMR

Question 15

What are the 4 Steps in Managements decision making process

Answer 15

1. Identify the problem and assign responsibility
2. determine and evaluate possible courses of action
3. make a decision
4. Review results of the decision

Question 16

What is meant by relevant costs

Answer 16

only factors to consider 1) those costs and revenues that are different for each alternative
2) costs and revenues that will occur in the future

Question 17

What is meant by opportunity costs

Answer 17

The potential benefit that may be lost from following a given course of action

Question 18

What is meant by sunk costs

Answer 18

Costs that cannot be changed by any present or future decision

Question 19

What is the basic decision rule in the case of special order

Answer 19

Accept the special order if the incremental price exceeds the incremental costs to complete the order

Question 20

What is the basic decision rule in the case of sell or process further

Answer 20

Process further as long as the incremental revenue rom the processing is more than the incremental processing costs

Question 21

What is the basic decision rule in the case of retain or replace equipment

Answer 21

company should choose the option that results in the lowest cost (and thus the highest income) over the relevant time period

Question 22

What is absorption costing

Answer 22

all manufacturing costs are charged to the product, DM+DL+VOH+FOH

Question 23

What is variable costing

Answer 23

only variable manufacturing costs are product costs, DM+DL+VOH

Question 24

Under absorption costing, when is operating income higher

Answer 24

when units produced exceed units sold

Question 25

Under absorption costing, when is operating income lower

Answer 25

when units produced are less then units sold

Question 26

What is the standard costing method under IFRS

Answer 26

Absorption costing

Question 27

What are the pros of variable costing

Answer 27

1. consistent with CVP and incremental analysis 2. net income is not affected by change in production 3. affected by change in sales levels, more realistic assessment 4. easier to identify FC and VC effect on the business

Question 28

What is the leverage equation

Answer 28

=CM/ operating income