SPECIFY IF TRUE OR FALSE, IF FALSE CORRECT THE STATEMENT

Chapter 6:

1. Variable costs are costs that change in total with the level of business activity. The variable cost per unit remains constant.

2. Fixed costs are costs that do not change in total with the level of business activity. However, the fixed cost per unit varies inversely with changes in the level of business activity.

3. Mixed costs contain both fixed and variable cost components.

4. The high-low method can be used to estimate the variable and fixed costs in a mixed cost.

5. Full costing (absorption costing) is required by GAAP. Direct labor, direct materials, variable manufacturing overhead, and fixed manufacturing overhead are included in the cost of inventory.

6. Variable costing is used internally for decision-making purposes. Direct labor, direct materials, and variable manufacturing overhead are included in the inventory costs.

7. The treatment of fixed manufacturing overhead is the only difference between full and variable costing. Fixed manufacturing overhead is an expense on the income statement in the period incurred under variable costing.

8. When the units produced equals the units sold, the net income under full costing equals the net income under variable costing.

9. When the units produced are greater than the units sold, the net income under full costing is greater than the net income under variable costing.

10. When the units produced are less than the units sold, the net income under full costing is less than the net income under variable costing.

11. A variable costing income statement reports the contribution margin. A full costing income statement reports the gross margin.

12. The full costing method can be used by managers to manipulate performance results.

Chapter 7:

1. The break-even point is the number of units that must be sold or amount of sales revenue that must generated to have no profit or no loss. In other words, the net income is zero.

2. The profit equation is: Profit = Sales less Total Variable Costs less Total Fixed Costs.

3. The margin of safety is the difference between the expected sales and the break-even sales.

4. The contribution margin per unit is equal to the sales price per unit less the variable costs per unit.

5. The breakeven in units is equal to the Total Fixed Costs divided by the contribution margin in units. Know how to calculate the breakeven point.

6. The required number of units that must be sold in order to achieve a specified profit level (operating income) is equal to the sum of the Total Fixed Costs plus the Operating Income (Profit Level) divided by the contribution margin in units. Know how to calculate the sales in units to achieve a desired profit level.

7. An increase in fixed costs or variable costs will increase the break-even point. An increase in sales price will decrease the break-even point.

8. Operating leverage refers to the cost structure of the business. A business with high percentage of fixed costs is considered to have a high operating leverage.

Chapter 8:

1. Decision making is based on incremental analysis which investigates incremental revenues and incremental costs. Incremental costs are often called differential costs or relevant costs.

2. Incremental analysis investigates the differences in revenues and costs for different decision alternatives.

3. Sunk costs are not relevant in the decision-making process. Avoidable costs are relevant costs in the decision-making process.

4. Opportunity costs are the benefits that are lost when one alternative is chosen over another alternative.

5. Common costs are costs that are not directly traceable to a product line or department. Instead, these costs are allocated to the individual product lines or departments. If one product line or department is dropped, the common costs are allocated to the remaining product lines or departments.

6. A product line should be dropped only when the total net income of a business will increase if the product line is eliminated. Usually the product line should be retained if contribution margin is greater than the avoidable costs (cost savings).

7. Products should be processed further when the incremental revenue from the additional processing is greater than the additional costs of the additional processing. The joint costs are sunk costs in an additional processing decision.

8. When there is a resource constraint, a business should strive for the highest contribution margin per unit of the constraint.

9. A supplier or vendor is paid for the cost of production plus a fixed amount (or percentage of cost) under a cost-plus contract.

Chapter 9:

1. A budget is a formal document that outlines a financial plan for achieving goals. A business is not required to prepare budgets.

2. Budgets are used to increase communication and coordination and to evaluate performance.

3. When budgets are prepared using zero-based budgeting, all budgeted amounts are justified for each budget period.

4. The master budget is a collection budgets such the sales budget, the production budget, and the direct materials budget.

5. The sales or revenue budget is the first budget prepared in the master budget sequence.

6. For a manufacturer, the production budget is the second budget prepared. Production in units is equal to the budgeted sales in units plus the desired ending inventory in units less the beginning inventory in units. Know how to calculate a production budget.

7. After the production budget is prepared, direct materials and direct labor budgets are prepared. Know how to calculate direct materials purchases and direct labor requirements.

8. Cash collections (receipts) and cash payments (disbursements) budgets provide information for determining the cash balance, the amount of excess cash for investment, and the amount of cash available for capital acquisitions. Know how to calculate cash receipts from sales and cash disbursements for purchases.

9. A budget variance is the difference between the budgeted and actual amount.