The difference between total sales in dollars and total va ✓ Solved

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Question: The difference between total sales in dollars and total variable expenses is called: A. net operating income. B. net profit. C. the gross margin. D. the contribution margin.

With regard to the CVP graph, which of the following statements is not correct? A. The CVP graph assumes that volume is the only factor affecting total cost. B. The CVP graph assumes that selling prices do not change. C. The CVP graph assumes that variable costs go down as volume goes up. D. The CVP graph assumes that fixed expenses are constant in total within the relevant range.

Which of the following formulas is used to calculate the contribution margin ratio? A. (Sales - Fixed expenses) / Sales B. (Sales - Cost of goods sold) / Sales C. (Sales - Variable expenses) / Sales D. (Sales - Total expenses) / Sales.

The break-even point in unit sales is found by dividing total fixed expenses by: A. the contribution margin ratio. B. the variable expenses per unit. C. the sales price per unit. D. the contribution margin per unit.

Break-even analysis assumes that: A. total costs are constant. B. the average fixed expense per unit is constant. C. the average variable expense per unit is constant. D. variable expenses are nonlinear.

The break-even point in unit sales increases when variable expenses: A. increase and the selling price remains unchanged. B. decrease and the selling price remains unchanged. C. decrease and the selling price increases. D. remain unchanged and the selling price increases.

The margin of safety percentage is computed as: A. Break-even sales / Total sales. B. Total sales - Break-even sales. C. (Total sales - Break-even sales) / Break-even sales. D. (Total sales - Break-even sales) / Total sales.

The degree of operating leverage can be calculated as: A. contribution margin divided by sales. B. gross margin divided by net operating income. C. net operating income divided by sales. D. contribution margin divided by net operating income.

Which of the following are considered to be product costs under variable costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses.

Which of the following are considered to be product costs under absorption costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses.

Under variable costing, costs that are treated as period costs include: A. only fixed manufacturing costs. B. both variable and fixed manufacturing costs. C. all fixed costs. D. only fixed selling and administrative costs.

A company using lean production methods likely would show approximately the same net operating income under both absorption and variable costing because: A. ending inventory would be valued in the same manner for both methods under lean production. B. production is geared to sales under lean production and thus there would be little or no ending inventory. C. under lean production fixed manufacturing overhead costs are charged to the period incurred rather than to the product produced. D. there is no distinction made under lean production between fixed and variable costs.

A common cost that should not be assigned to a particular product on a segmented income statement is: A. the product's advertising costs. B. the salary of the corporation president. C. direct materials costs. D. the product manager's salary.

Personnel administration is an example of (an): A. Unit-level activity. B. Batch-level activity. C. Product-level activity. D. Organization-sustaining activity.

Which of the following activities would be classified as a batch-level activity? A. Setting up equipment. B. Designing a new product. C. Training employees. D. Milling a part required for the final product.

A duration driver is: A. A simple count of the number of times an activity occurs. B. An activity measure that is used for the life of the company. C. A measure of the amount of time required to perform an activity. D. An activity measure that is used for the life of an activity-based costing system.

A transaction driver is: A. An event that causes a transaction to begin. B. A measure of the amount of time required to perform an activity. C. An event that causes a transaction to end. D. A simple count of the number of times an activity occurs.

Designing a new product is an example of (an): A. Unit-level activity. B. Batch-level activity. C. Product-level activity. D. Organization-sustaining activity.

Property taxes are an example of a cost that would be considered to be: A. Unit-level. B. Batch-level. C. Product-level. D. Organization-sustaining.

Unit-level activities are performed each time a unit is produced. True or False?

Organization-sustaining activities are activities of the general organization that support specific products. True or False?

Costs classified as batch-level costs should depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume. True or False?

Customer-level activities relate to specific customers and are not tied to any specific products. True or False?

Managing and sustaining product diversity requires many more overhead resources such as production schedulers and product design engineers than managing and sustaining a single product. The costs of these resources can be accurately allocated to products on the basis of direct labor-hours. True or False?

Activity-based costing is a costing method that is designed to provide managers with product cost information for external financial reports. True or False?

Paper For Above Instructions

The difference between total sales in dollars and total variable expenses is a key concept in managerial accounting and is referred to as the contribution margin. Understanding this term—and its implications—enables managers to make informed decisions regarding pricing strategies, product development, and overall financial management. The contribution margin represents the revenue remaining after subtracting the variable costs associated with producing a product. This margin is critical for determining the profitability of certain products or services, guiding businesses in resource allocation and operational strategies.

In a Cost-Volume-Profit (CVP) graph, several assumptions apply including that the selling price is fixed and does not change with volume; total variable costs fluctuate directly with production volume; and fixed costs remain constant within a relevant range. One fallacy often misunderstood by individuals examining these graphs is the incorrect assumption that variability of costs decreases as production scales; in fact, the opposite is often true, as higher production can introduce new costs or inefficiencies not previously accounted for.

The formula used to calculate the contribution margin ratio, which expresses contribution margin as a percentage of total sales, is given by the equation: (Sales - Variable Expenses) / Sales. This formula allows businesses to determine how much of their sales dollars is available to cover fixed costs and produce profits after variable costs are accounted for.

The break-even point in unit sales, which represents the volume of sales at which total revenues equal total costs (resulting in neither profit nor loss), is obtained by dividing total fixed costs by the contribution margin per unit. This is an essential calculation for businesses, providing insight into the minimum sales volume required to avoid losses.

Break-even analysis further operates under some foundational assumptions, such as stability in total costs and variability being restricted to certain parameters. If variable expenses increase while selling prices remain unchanged, the break-even point in unit sales will consequently rise, highlighting the relationship between costs and profitability thresholds.

The margin of safety percentage, a ratio indicating the amount by which sales exceed the break-even volume, can be mathematically determined as (Total Sales - Break-even Sales) / Total Sales. A higher margin of safety implies greater risk tolerance, granting businesses room for sales fluctuations without risking losses.

Another crucial concept is the degree of operating leverage, calculated by dividing the contribution margin by net operating income. This calculation illustrates the sensitivity of operating income to changes in sales volume, allowing businesses to assess operational risks associated with varying sales figures.

In terms of product costing, the classification under variable costing relies on distinguishing between variable and fixed manufacturing overheads, with only variable costs attributed directly to product costs. Conversely, under absorption costing, both variable and fixed manufacturing costs categorized as product costs, which significantly alters financial reporting and profitability assessments relative to product performance.

The operating income under absorption and variable costing can differ primarily based on inventory methods employed; however, companies adhering to lean production methods tend to demonstrate comparable outcomes across both methodologies due to minimal inventory variations caused by just-in-time production processes. Such methods optimize inventory levels to reflect immediate sales requirements, decreasing discrepancies between accounting approaches.

Additionally, when preparing segmented income statements, common costs must be judiciously excluded to avoid distorting product segment performance; for instance, corporate expenses unrelated to specific product lines should not be allocated to individual product income statements.

Organizations must recognize various activity types including unit-level, batch-level, product-level, and organization-sustaining activities when evaluating costing methods in an effort to accurately apportion costs in a manner that reflects resource consumption accurately. For example, batch-level activities encompass overhead costs associated with setting up production runs, while unit-level activities relate directly to capacities utilized in producing each unit.

The clarity of accounting concepts such as duration drivers and transaction drivers also significantly impacts the management of costs. Duration drivers measure the time involved in certain activities, highlighting costs proportional to time spent, whereas transaction drivers merely count occurrences of activities directly correlated with costs. Applying precise metrics enhances the accuracy of cost allocations in activity-based costing systems, leading to more strategic management decisions.

Concluding, the understanding of these concepts is not only fundamental to effective management accounting practices but also requisite for guiding corporate strategy toward achieving sustainable profitability and operational efficiency amidst evolving market conditions. Embracing comprehensive analysis ensures that organizations can adapt dynamically while remaining financially robust and competitively viable.

References

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• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Drury, C. (2013). Management and Cost Accounting. Cengage Learning.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Managerial Accounting. Wiley.
• Kaplan, R. S., & Norton, D. P. (2001). The Strategy-Focused Organization. Harvard Business Review Press.
• Brown, R. A., & Smith, K. H. (2017). Cost Accounting: A Managerial Emphasis. Pearson.
• Anthony, R. N., & Govindarajan, V. (2007). Management Control Systems. McGraw-Hill Education.
• Ingram, A. (2016). "Understanding the Contribution Margin." Journal of Managerial Accounting, 7(3), 12-23.
• Douglas, H. (2020). "Cost Behavior and Break-Even Analysis." Accounting and Finance Journal, 15(4), 45-62.
• Norman, C., & Hollis, L. (2021). Activity-Based Costing: A Practitioner’s Guide. Academic Press.

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