theoretical questions and answers

Knowledge of cost behavior allows a manager to assess changes in costs that result from changes in activity.. For example, if excess capacity exists, bids that at least cover variable c

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DISCUSSION QUESTIONS AND SUGGESTED ANSWERS

– Chapter 3, 4, and 13

(Cornerstones of Managerial Accounting 3 rd edition, Mowen et al, 2009)

Cost Cost Concepts and Classifications

DQ 3.1 Knowledge of cost behavior allows a manager to assess changes in costs

that result from changes in activity This allows a manager to examine the effects

of choices that change activity For example, if excess capacity exists, bids that at least cover variable costs may be totally appropriate Knowing what costs are variable and what costs are fixed can help a manager make better bids and,

ultimately, better business decisions

DQ 3.4 Some account categories are primarily fixed or variable Even if the cost is

mixed, either the fixed component or the variable component is relatively small As

a result, assigning all of the cost to either a fixed or variable category is unlikely to result in large errors For example, depreciation on property, plant, and equipment

is largely fixed The cost of telephone expense for the sales office, if it consisted primarily of long distance calls, could be seen as largely variable (variable with

respect to the number of customers)

DQ 3.5 Committed fixed costs are those incurred for the acquisition of long-term

activity capacity and are not subject to change in the short run Annual resource expenditure is independent of actual usage For example, the cost of a factory building is a committed fixed cost Discretionary fixed costs are those incurred for the acquisition of short-term activity capacity, the levels of which can be altered quickly In the short run, resource expenditure is also independent of actual activity

usage Salaries of engineers is an example of such an expenditure

DQ 3.7 Mixed costs are usually reported in total in the accounting records How

much of the cost is fixed and how much is variable is unknown and must be

estimated

CPV Analysis

DQ 4.2 The units sold approach defines sales vol-ume in terms of units of product

and gives answers in these same terms The unit con-tribution margin is needed to solve for the break-even units The sales revenue ap-proach defines sales volume

in terms of revenues and provides answers in these same terms The overall contribution margin ratio can be used to solve for the break-even sales dollars

DQ 4.3 Break-even point is the level of sales activity where total revenues equal

total costs, or where zero profits are earned

DQ 4.4 At the break-even point, all fixed costs are covered Above the break-even

point, only variable costs need to be covered Thus, contribution margin per unit is profit per unit, provided that the unit selling price is greater than the unit variable cost (which it must be for break even to be achieved)

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DQ 4.8 Packages of products, based on the expected sales mix, are defined as a

single product Selling price and cost information for this package can then be used to carry out CVP analysis

DQ 4.9 This statement is wrong; break-even analy-sis can be easily adjusted to

focus on tar-geted profit

DQ 4.13 Operating leverage is the use of fixed costs to extract higher percentage

changes in prof-its as sales activity changes It is achieved by increasing fixed costs while lowering variable costs Therefore, increased leverage implies increased risk, and vice versa

DQ 4.15 A declining margin of safety means that sales are moving closer to the

break-even point Profit is going down, and the possibility of loss is greater Managers should analyze the reasons for the decreasing margin of safety and look for ways to increase revenue and/or decrease costs

Short-term Decision Making

DQ 13.2 Depreciation is an allocation of a sunk cost This cost is a past cost and

will never differ across alternatives

DQ 13.3 The salary of the supervisor of an assembly line with excess capacity is

an example of an irrelevant future cost for an acceptorreject decision

DQ 13.6 A complementary effect is the loss of revenue on a secondary product

when the primary product is dropped Thus, complementary effects may make it more expensive to drop a product

DQ 13.8 No Joint costs are irrelevant They occur regardless of whether the

product is sold at the splitoff point or processed further

DQ 13.10 No If a scarce resource is used in producing the two products, then the

product providing the greatest contribution per unit of scarce resource should be selected For more than one scarce resource, linear programming may be used to select the optimal mix

DQ 13.11 If a firm is operating below capacity, then a price that is above variable

costs will increase profits