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FMA
Financial and Managerial Accounting Unit 5
| Question | Answer |
|---|---|
| What is the primary use of managerial accounting? | Managerial accounting is used by internal managers for decision-making and provides tailored information for competitive advantage. |
| How does managerial accounting differ from financial accounting? | Managerial accounting is used by internal managers for decision-making, while financial accounting is used by external parties (e.g., creditors, investors) to assess a company's financial health. |
| What are the three types of businesses in accounting? | Manufacturing Business (e.g., General Motors) – Produces goods for sale. Merchandising Business (e.g., Walmart) – Buys and resells goods. Service Business (e.g., Consulting Firm) – Provides nonphysical products (services). |
| Why are costs important in managerial accounting? | Costs are critical for creating value for customers, determining the cost of goods sold, and making informed decisions. |
| How are costs analyzed in managerial accounting? | Variable Costs – Change with activity. Fixed Costs – Remain constant. |
| Why is understanding fixed and variable costs important in managerial accounting? | Understanding these costs is essential for calculations like break-even analysis, which helps in making important business decisions. |
| What are the key functions of management accounting? | Planning – Setting goals and strategies. Controlling – Monitoring execution to ensure goals are met. Evaluating – Assessing performance against goals. |
| What is the purpose of the ROI analysis implemented by Donaldson Brown at DuPont? | The ROI analysis allowed DuPont to evaluate business segments, compare profitability, and focus on maximizing profit through effective asset management. |
| What was the impact of the ROI tool at DuPont? | The ROI tool enabled DuPont to manage its diverse operations effectively by integrating cost and asset management, becoming one of the most influential management accounting techniques. |
| What are some key uses of managerial accounting? | Product Costs – Determining the cost of producing goods/services. Breakeven Analysis – Assessing the profitability of new business/product lines. Budgeting – Creating a financial plan. Performance Evaluation – Tracking employee and company performance. |
| What are the key uses of financial accounting? | Credit Analysis – Assessing financial health for loan decisions. Regulatory Reporting – Monitoring the health of institutions. Investment Decisions – Helping investors decide whether and how much to invest. |
| What are the key differences between management accounting and financial accounting? A: | Management Accounting: Used internally, focuses on operational decisions, real-time data (e.g., cost analysis, budgeting). Financial Accounting: Used externally, focuses on summarizing financial status with periodic reports (e.g., balance sheets, income |
| What is the focus of financial accounting? | Financial accounting focuses on providing external stakeholders with information about a company’s financial health, typically through reports like balance sheets and income statements. |
| How does managerial accounting help in decision-making? | Managerial accounting provides internal information, such as cost analysis, budgeting, and performance tracking, which helps management make informed decisions to improve operations and business performance. |
| How does financial accounting differ from managerial accounting? | Financial accounting provides data to external stakeholders (investors, creditors, regulators) to evaluate a company's financial health, while managerial accounting is used internally to inform operational and strategic decisions. |
| What are the key features of managerial accounting? | Internal use – Primarily for managers and employees. Detailed data – Includes financial and non-financial information. Flexible – Not governed by external regulations. Confidential – Often considered proprietary information. |
| What are the key features of financial accounting? | External use – Primarily for investors, creditors, and regulators. Standardized data – Follows strict reporting rules like GAAP or IFRS. Publicly available – Information is shared with external stakeholders. Focuses on financial health – Provides a sum |
| What is the main goal of managerial accounting? | To help management make day-to-day operational decisions, improve efficiency, and maintain a competitive advantage. |
| What is the main goal of financial accounting? | To provide standardized financial reports that external stakeholders can use to assess the financial health of a company. |
| How does managerial accounting help in decision-making at Walmart? | Managers use managerial accounting data (e.g., product costs, budgeting, performance evaluation) to guide strategic decisions like resource allocation, product lines, and daily operations. |
| What type of data does managerial accounting include? | Managerial accounting includes both financial and non-financial data (e.g., employee turnover, customer satisfaction), helping managers make informed decisions. |
| What type of data does financial accounting include? | Financial accounting provides only financial data, such as balance sheets, income statements, and cash flow statements, primarily for external stakeholders. |
| What is the key difference between financial and managerial accounting in terms of audience? A: | Financial Accounting: External (investors, creditors, regulators). Managerial Accounting: Internal (management, employees). |
| What is an example of financial accounting at Walmart? | Walmart’s $510.3 billion in sales for the year, which is reported to external stakeholders to assess Walmart’s overall financial performance. |
| What is an example of managerial accounting at Walmart? | Detailed insights such as sales by store, region, or department, and ad campaign effectiveness, which help Walmart's management make better operational decisions. |
| How does managerial accounting provide a competitive edge? | It provides detailed, real-time information for managers to make better decisions regarding production, cost management, and resource allocation. |
| What role does regulation play in financial accounting? | Financial accounting is governed by external regulations like GAAP (U.S.) and IFRS (internationally), ensuring consistency and comparability across companies. |
| Why is managerial accounting considered flexible? | It evolves based on best practices tailored to a company's specific needs and is not governed by standardized external rules, allowing for more adaptive decision-making. |
| What are some of the key uses of managerial accounting data? | It helps in decisions about product-line profitability, budgeting, cost control, performance evaluation, and resource allocation. |
| Which statement about managerial accounting data is true? | Managerial accounting data are created based on competitive needs that are unique to the organization. |
| Which characteristic is a unique feature of management accounting information? | Management accounting information is composed of both financial and nonfinancial data. |
| Which group represents the primary users of managerial accounting information? | Managers |
| Who prepares managerial accounting information? | Cost accountants or cost accounting managers. |
| What is the primary purpose of managerial accounting? | To provide internal data for management to make decisions. |
| Name a decision that managerial accounting helps with. | Whether to produce in-house or outsource production. |
| Who prepares financial accounting information? | The financial accounting department, including controllers, accountants, and bookkeepers. |
| What is the purpose of financial accounting? | To prepare financial statements (balance sheet, income statement, cash flow statement). |
| What is the primary responsibility of financial accounting? | Overseeing the processing of day-to-day transactions in the accounting cycle. |
| Who are the primary users of managerial accounting information? | Company managers. |
| What is the purpose of managerial accounting for its primary users? | To help managers make informed financial decisions for the business (used internally). |
| Who are the primary users of financial accounting information? | External parties, such as investors, creditors, and lenders. |
| What is the purpose of financial accounting for its primary users? | To make investment or lending decisions based on the company’s financial health. |
| What are the three main functions of managerial accounting? | Planning, controlling, and evaluating. |
| What is the purpose of planning in managerial accounting? | To identify problems or opportunities, analyze alternatives, and choose the best course of action. |
| What is long-run planning (strategic planning) in managerial accounting? | Focuses on decisions affecting 3-5 years, such as market expansion or asset acquisition. |
| What is short-run planning (operational budgeting) in managerial accounting? | Focuses on daily, weekly, or monthly goals and operations. |
| What is the purpose of controlling in managerial accounting? | To track actual performance against planned goals and analyze variances. |
| What is variance analysis in controlling? | It compares budgeted figures with actual results and helps identify corrective actions for significant deviations. |
| Give an example of controlling in managerial accounting. | Using real-time data to monitor a baseball pitcher’s performance. |
| What is the purpose of evaluating in managerial accounting? | To compare actual performance to planned goals, provide feedback, and identify areas for improvement. |
| How does planning help in long-term vs short-term management? | Long-term planning sets the direction for future growth (strategic and capital budgeting), while short-term planning focuses on daily actions to execute the strategy effectively. |
| Why is budgeting important in business management? | Budgeting provides a roadmap to foresee challenges and guide decisions, just like driving a car with a windshield. |
| What does controlling help businesses adjust to? | It helps businesses make real-time adjustments to stay on track with their goals and strategies. |
| What does the evaluation process in managerial accounting involve? | Reviewing performance, providing feedback, rewarding good performance, and adjusting plans if necessary. |
| How does management accounting contribute to competitive advantage? | By making better decisions, allocating resources effectively, and protecting sensitive information from competitors. |
| What is the role of nonfinancial data in managerial accounting? | Nonfinancial data, like employee turnover, helps identify potential issues before they become financial problems. |
| Why is secrecy important in managerial accounting? | To protect strategic plans and maintain a competitive advantage by keeping proprietary information confidential. |
| What are the three steps in the management accounting cycle? | Planning, controlling, and evaluating. |
| How does continuous evaluation benefit a business? | It allows companies to refine strategies, adapt to changes, and remain competitive in the market. |
| Company managers are important users of managerial accounting information. What are the three primary functions of company managers? | Planning, controlling, and evaluating |
| Which statement correctly distinguishes the uses of financial accounting information from the uses of managerial accounting information? | Financial accounting information is prepared according to a generally accepted set of rules. |
| Which activity involves the process of tracking the actual performance of a company? | Controlling |
| What does long-run planning include? | Strategic planning and capital budgeting |
| What are the three main types of businesses? | Manufacturing, Service, and Merchandising. |
| What does a manufacturing business do? | It uses components or raw materials to make finished goods for sale to customers. |
| What are the three main costs associated with manufacturing businesses? | Direct materials, direct labor, and overhead costs. |
| What are product costs in manufacturing? | Costs directly tied to the production of goods, such as materials and labor, which are assets until the product is sold. |
| What are period costs in manufacturing? | Non-manufacturing costs such as administrative expenses, which are immediately expensed. |
| What is a service business? | An organization that provides a nonphysical product (a service) that delivers value to the customer. |
| What type of costs do service businesses typically incur? | Period costs, since they generate immediate revenue through services provided. |
| What is a merchandising business? | A business that buys finished goods from suppliers and resells them to customers. |
| Give an example of a manufacturing business. | General Motors (GM), which manufactures cars. |
| Give examples of service businesses. | Accounting firms, legal firms, healthcare providers, and software companies. |
| Give examples of merchandising businesses. | Walmart, Amazon, J.C. Penney, and Kroger. |
| What costs do merchandising businesses incur? | Product costs (from purchasing inventory) and period costs (operating costs such as rent, wages, utilities). |
| What are the key characteristics of a manufacturing business? | They start with raw materials, use labor and machinery to create products, and sell finished goods to customers. |
| What are the key characteristics of a service business? | They provide non-physical services, generate revenue from labor and expertise, and typically have minimal raw material use. |
| What are the key characteristics of a merchandising business? | They purchase finished goods from suppliers and sell them at a markup, focusing on retail and distribution. |
| What type of costs do service businesses mainly incur? | Period costs, such as salaries for skilled workers and office expenses. |
| What is the role of labor in service businesses? | Labor is the primary source of revenue, as services are delivered by skilled professionals or experts. |
| How do manufacturers handle inventory? | They handle raw materials, work-in-progress, and finished goods as part of the manufacturing process. |
| How do merchandisers handle inventory? | Merchandisers purchase finished goods from third-party manufacturers and sell them to consumers without altering them. |
| How does a manufacturer differ from a merchandiser? | A manufacturer makes products from raw materials, while a merchandiser buys and resells finished products. |
| What is an example of a service business that uses intellectual capital? | A law firm providing legal advice and representation. |
| What is the primary focus of a merchandising business? | The focus is on retailing and distribution, buying products from suppliers and selling them to end consumers. |
| How do period costs differ in manufacturing and service businesses? | In manufacturing, period costs include administrative expenses, while in service businesses, period costs are often related to employee salaries and overhead. |
| Why do service businesses generally not have raw material costs? | Service businesses provide intangible services and rely on labor and intellectual capital instead of raw materials. |
| What is the difference between product costs and period costs in business accounting? | Product costs are directly tied to production (e.g., materials, labor), while period costs are associated with the operation of the business and are expensed immediately. |
| What is a common characteristic of all three types of businesses (manufacturing, service, and merchandising)? | All three types aim to generate revenue, but they do so using different approaches: manufacturing makes goods, service provides expertise, and merchandising resells goods. |
| What is the key revenue source for a service business like an accounting firm? | Revenue comes primarily from the expertise and time of the skilled professionals working in the firm. |
| Which type of business is a typical retailer? | Merchandising business |
| Which types of costs does a merchandiser have? | Both product and period costs |
| Which types of costs does a manufacturer have? | Both product and period costs |
| Which type of business purchases finished goods for resale? | Merchandising |
| Which statement identifies a difference between managerial and financial accounting? | Managerial accounting has substantial competitive value, while financial accounting is not a competitive tool. |
| What is a characteristic of managerial accounting systems that is not also a characteristic of financial accounting systems? | Managerial accounting includes budget and forecast data. |
| Why is accurate product costing critical for businesses like Apple? | Accurate product costing helps set appropriate pricing, avoid underpricing or overpricing, and make informed decisions on production, outsourcing, and product lines. |
| What is the primary role of product costing in businesses? | Product costing helps businesses determine the total costs involved in producing or delivering a product or service, ensuring proper pricing and cost management. |
| What is the cost flow for manufacturing businesses? | Work-in-process inventory: Raw materials, labor, and overhead are accumulated during production. Finished goods inventory: Completed products are moved here. Cost of goods sold (COGS): Costs are transferred to COGS when products are sold. |
| How do service businesses handle costs differently than manufacturing businesses? | Service businesses don’t deal with raw materials but accumulate costs (mainly labor and overhead) as services are provided, recognizing these costs as expenses once the service is delivered. |
| How do merchandising businesses track their costs? | Merchandising businesses purchase finished goods from suppliers. Costs are recorded when inventory is bought, and when goods are sold, the costs are recognized as COGS. |
| What are the three main categories of costs in product costing? | Direct materials, direct labor, and overhead. |
| What are direct materials in product costing? | Raw materials directly used in making a product, such as tomatoes and tortillas for a quesadilla at a restaurant. |
| What is direct labor in product costing? | The labor directly involved in producing or delivering a product, such as cooks or servers in a restaurant. |
| What are overhead costs in product costing? | Indirect costs necessary for business operations but not directly tied to a specific product, such as rent, utilities, and management salaries. |
| How does accurate product costing help businesses like restaurants? | It helps determine the cost of delivering a product or service, ensuring the business can price items appropriately to cover costs and stay competitive. |
| What are the primary costs for service businesses? | Labor and overhead, as they don’t deal with raw materials but focus on providing services. |
| How do costs flow in service businesses? | Costs accumulate as services are provided and are recognized as expenses when the service is delivered. |
| What is the importance of understanding cost flow methods? | It allows businesses to track costs effectively, manage resources, and make better decisions regarding pricing, cost control, and budgeting. |
| How does understanding product costing benefit a business like Walmart? | It helps Walmart track inventory costs, manage profitability, and set prices that ensure competitive sales while covering costs. |
| Why is understanding direct materials, labor, and overhead critical for businesses? | These categories help businesses identify the costs of producing or providing goods and services, aiding in effective pricing, cost control, and profitability. |
| How does the cost flow for merchandising businesses differ from manufacturing businesses? | Merchandisers buy finished goods for resale and recognize costs when the goods are sold, whereas manufacturers incur costs related to raw materials, labor, and overhead throughout the production process. |
| Why are cost flow methods important in business operations? | They ensure accurate tracking of costs, help make informed pricing decisions, and contribute to effective budgeting and performance evaluation. |
| What impact does inaccurate product costing have on a business? | Inaccurate costing can lead to poor pricing decisions, either underpricing (leading to reduced profits) or overpricing (causing a loss of market share to competitors). |
| What do service businesses rely on for cost flow, instead of raw materials? | Service businesses rely on labor and overhead costs. |
| How does product costing help in setting appropriate pricing for businesses? | By accurately calculating the total costs of products or services, businesses can set prices that cover expenses and help maintain profitability. |
| Why is it important for businesses to accumulate and track costs accurately? | Why is it important for businesses to accumulate and track costs accurately? |
| What are the three main categories of product costs in a manufacturing business? | Direct Materials Direct Labor Manufacturing Overhead |
| What is the flow of manufacturing costs in a business? | Raw Materials: Purchased and stored in raw materials inventory. Work-in-Process Inventory: Raw materials transferred when used in production. Finished Goods: Once products are completed, they move to finished goods inventory. Cost of Goods Sold (COGS): |
| What costs are included in the Cost of Goods Manufactured (COGM) statement? | Raw Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Work-in-Process Inventory (beginning and ending) Cost of Goods Manufactured (final value) |
| How is the Cost of Goods Sold (COGS) statement structured? | Beginning Finished Goods Inventory Add: Cost of Goods Manufactured Cost of Goods Available for Sale Less: Ending Finished Goods Inventory Cost of Goods Sold Impact on Income Statement: Subtracted from sales revenue to calculate gross profit. |
| What is the difference between product costs and period costs? | Product Costs: Costs incurred in the factory to produce a product (e.g., direct materials, direct labor, manufacturing overhead). These are inventoried and later moved to COGS when sold. Period Costs: Costs not related to production and incurred outside |
| What are examples of product costs in wood furniture manufacturing? | Direct Materials: Wood used for furniture. Direct Labor: Wages for workers making the furniture. Manufacturing Overhead: Factory rent, utilities, supervisor wages, machinery maintenance. |
| What are some examples of period costs? | Salaries of administrative staff (e.g., CEO, CFO). Marketing and advertising expenses. Research and development (R&D) expenses. Administrative building costs (e.g., rent, depreciation). |
| How does the Cost of Goods Sold (COGS) impact the income statement? | COGS is subtracted from sales revenue to calculate gross profit, which is then adjusted for operating expenses to determine operating income and net income. |
| How do product costs flow through the manufacturing process? | Raw materials are purchased and stored. Materials are transferred to work-in-process inventory during production. Once completed, goods move to finished goods inventory. When sold, costs move to COGS on the income statement. |
| What is the impact of the factory-related property tax on product costing? | If the property tax is for the factory building, it is considered a product cost and part of manufacturing overhead. If it’s for an administrative office, it’s a period cost and expensed immediately. |
| How is the gross profit calculated using the COGS statement? | Sales Revenue – Cost of Goods Sold = Gross Profit |
| Why is understanding cost flows important in manufacturing businesses? | Monitoring cost flow helps control production costs, evaluate manufacturing performance, and make informed pricing and operational decisions. |
| How does the distinction between product and period costs affect financial reporting? | Understanding the difference ensures accurate inventory reporting, proper expense recognition, and appropriate profit margins in financial statements. |
| What does the "Cost of Goods Available for Sale" represent in the COGS statement? | It represents the sum of the beginning finished goods inventory and the cost of goods manufactured during the period. |
| What is the key takeaway from the importance of monitoring product costs in manufacturing? | Monitoring product costs helps businesses evaluate production efficiency, maintain profitability, and make informed decisions regarding pricing, budgeting, and cost control. |
| What is the role of the Work-in-Process Inventory in manufacturing cost flow? | Work-in-process inventory accumulates costs as products are being worked on, and once products are completed, the costs are transferred to finished goods inventory. |
| What are product costs? | Product costs are costs directly related to the production of goods or services. These costs are incurred inside the production facility and are classified as part of inventory until the product is sold. |
| What are the three main types of product costs? | Direct Materials: Raw materials used directly in production (e.g., wood for furniture). Direct Labor: Wages of workers directly involved in production (e.g., assembly line workers). Manufacturing Overhead: Indirect production costs (e.g., factory rent, |
| What are period costs? | Period costs are costs not directly tied to the production process. These costs are incurred from activities outside the production facility and are expensed in the period in which they occur. |
| What are examples of period costs? | Selling Costs: Advertising, sales commissions, delivery expenses. Administrative Costs: Salaries of corporate staff, office rent, office supplies. |
| What is the difference between product costs and period costs? | Product Costs: Directly tied to the production process (e.g., direct materials, direct labor, manufacturing overhead). Period Costs: Not tied to production, related to activities outside the production process (e.g., administrative, selling costs). |
| What are product costs in a fast-food setting? | Product Costs: Ingredients like lettuce, meat, and wages for food preparers (directly tied to creating the product, i.e., a sandwich). |
| What are period costs in a fast-food setting? | Period Costs: President’s salary, advertising costs, and office rent for the corporate headquarters (not tied to the sandwich production). |
| What are product costs for a manufacturing company like DuPont? | Product Costs: Factory manager’s salary, depreciation on factory buildings, wages of factory workers, raw materials used in production. |
| What are period costs for a manufacturing company like DuPont? | Period Costs: Selling and administrative expenses (e.g., corporate headquarters expenses). |
| How are product costs recorded in a manufacturing business? | Product costs are included in Cost of Goods Sold (COGS) once the product is sold. |
| How are period costs recorded in a business? | Period costs are expensed immediately in the period they are incurred (e.g., advertising, administrative costs). |
| What are examples of product costs for a merchandiser like Walmart? | Product Costs: The cost of purchasing goods for resale. |
| What are examples of period costs for a merchandiser like Walmart? | Period Costs: Selling costs like salaries of cashiers and advertising expenses. |
| How do product costs affect business decisions? | Product costs help businesses determine the true cost of making a product, assess profitability, and decide whether to continue or discontinue a product. |
| How do period costs affect business decisions? | Period costs help track operational expenses and manage overall business expenses, ensuring profitability and reducing waste. |
| Why is it important to distinguish between product and period costs? | Distinguishing between the two helps in pricing products accurately, understanding profitability, managing operational efficiency, and ensuring accurate financial reporting. |
| How are product costs related to profitability? | Knowing product costs helps businesses set prices that cover production expenses and maintain profitability. |
| How are period costs related to profitability? | Managing period costs helps businesses reduce unnecessary expenses and improve profitability by tracking and controlling non-production-related costs. |
| What is the key takeaway from understanding the distinction between product and period costs? | Proper classification of costs ensures accurate financial statements, better decision-making, and operational efficiency, which are essential for business success. |
| Which item is a period cost? | Wages of secretarial staff |
| Which item is a product cost? | Direct materials |
| What are the three main components of product costs in manufacturing organizations? | Direct Materials: Raw materials traceable to the finished product. Direct Labor: Wages paid to workers directly involved in production. Manufacturing Overhead: All production costs not directly tied to materials or labor (e.g., factory rent, utilities, |
| What are the main types of costs in service organizations? | Direct Labor: The effort of people providing the service. Overhead: Costs incurred to support service delivery (e.g., office rent, utilities). |
| How is overhead typically allocated in service organizations? | Overhead is often allocated based on an activity measure, such as billable hours (e.g., in a CPA firm, overhead might be allocated per billable hour worked). |
| What is the inventory flow in merchandising organizations? | Purchase: When inventory is purchased, it is recorded as an asset. Cost of Goods Sold (COGS): When items are sold, their cost is transferred from inventory to COGS. |
| What is a key difference between manufacturers, service companies, and merchandisers? | Manufacturers: Track raw materials, work-in-progress, and finished goods inventory. Service Companies: Focus on direct labor and overhead, with no significant inventory. Merchandisers: Buy inventory for resale, and cost flows from purchase to sale witho |
| What does the income statement of a manufacturing company focus on? | It focuses on costs like the cost of goods manufactured, beginning and ending inventory, and finished goods. |
| What does the income statement of a merchandising company focus on? | It includes net purchases and inventory changes based on beginning and ending inventory balances. |
| What does the income statement of a service company focus on? | It typically does not include COGS unless parts or merchandise are involved in the service process. |
| How are product costs accumulated in a service company? | Service companies accumulate direct labor and overhead costs, which are allocated based on activity measures like billable hours. These costs flow directly to the Cost of Services (similar to COGS). |
| What is an example of overhead allocation in a law firm? | In a law firm, overhead might be allocated at a rate of $70 per billable hour to ensure clients are charged for the resources used during service delivery. |
| What is the predetermined overhead rate in service businesses? | Service businesses compute a predetermined overhead rate to allocate overhead costs appropriately, ensuring clients are charged fairly for the resources used during service engagements. |
| What is the cost flow in a manufacturing business? | Raw Materials → Work in Process (WIP) → Finished Goods → Cost of Goods Sold (COGS) when sold. |
| What is the cost flow in a service business? | Supplies (minimal) → Direct Labor (Client Engagement) → Predetermined Overhead → Cost of Services when the service is delivered. |
| What is the cost flow in a merchandising business? | Merchandise Inventory → Sale → Cost of Goods Sold (COGS). |
| What is a key difference between manufacturing and service businesses in terms of cost flow? | Manufacturing businesses deal with tangible products (raw materials to finished goods), while service businesses focus on intangible services, with labor and overhead being the primary cost components. |
| What is a key difference between merchandising and manufacturing businesses? | Merchandising businesses purchase goods for resale, with minimal transformation, while manufacturing businesses produce goods by transforming raw materials into finished products. |
| What are some examples of service overhead? | Service overhead includes infrastructure (office buildings, equipment), support personnel (administrative staff), and office supplies (computers, printers, software). |
| Why is overhead allocation necessary in service businesses? | Overhead allocation ensures that clients pay for the resources required to deliver the service and prevents the firm from absorbing those costs. |
| What is the key takeaway from understanding cost flows in different types of businesses? | While the cost flows differ between manufacturing, service, and merchandising businesses, all three types of businesses share fundamental principles: handling resources (raw materials, labor), applying overhead, and transferring costs to the expense categ |
| Which product costs are substantial in both a service company and a manufacturing company? | Direct labor and overhead |
| What is an important difference in the cost accounts of a merchandising company compared to a manufacturing company? | A merchandising company has no raw materials inventory or work-in-process inventory. |
| What are the two main types of costs in cost behavior? | Variable Costs and Fixed Costs. |
| What are variable costs? | Variable costs change directly in proportion to the level of activity or production. Examples include direct materials and direct labor costs. |
| What are fixed costs? | Fixed costs remain constant, regardless of the level of activity or production. Examples include rent and administrative salaries. |
| What is Cost-Volume-Profit (C-V-P) Analysis? | C-V-P analysis helps businesses determine how many units need to be sold to cover fixed costs and start making a profit. |
| Why is C-V-P analysis valuable? | It helps answer the question: How much do you need to sell to earn a profit? It aids managers in making informed decisions about pricing, production levels, and profitability. |
| What is a real-world example of fixed costs affecting a business? | The airline industry faces high fixed costs related to owning and maintaining aircraft, even if flight sales are lower. |
| How does cost behavior help managers? | It allows managers to predict how changes in activity levels (like production or sales) will impact profits, aiding in better decisions on production, pricing, and strategy. |
| What is break-even analysis? | Break-even analysis calculates the point where a company's total revenues equal its total costs, meaning no profit or loss. |
| What are fixed costs in the context of a restaurant? | Fixed costs for a restaurant include rent, insurance, and loan interest, which do not change with the number of customers. |
| What are variable costs in the context of a restaurant? | Variable costs for a restaurant include ingredients, labor, and items like napkins or containers, which change depending on the number of customers. |
| How do you calculate the contribution margin per customer in a restaurant? | The contribution margin per customer is calculated by subtracting the variable cost per customer from the selling price per customer. Example: $10 (selling price) - $6 (variable cost) = $4 contribution margin. |
| What is the break-even formula for calculating the number of customers needed? | Break-even point (in customers) = Total Fixed Costs / Contribution Margin per Customer. |
| If a restaurant has $2,000 in fixed costs and a $4 contribution margin per customer, how many customers need to come to break even? | Break-even point = $2,000 / $4 = 500 customers. |
| Why is break-even analysis essential for a new restaurant? | It helps the restaurant owners understand how many customers they need to serve to cover costs and start making a profit. |
| What are fixed costs? | Fixed costs stay the same in total regardless of the number of goods or services produced or sold. Examples include salaries, rent, and insurance premiums. |
| What are variable costs? | Variable costs change directly in proportion to the level of activity, such as the number of customers, units produced, or services provided. Examples include materials, direct labor, and sales commissions. |
| Why is understanding fixed and variable costs important for businesses? | It helps businesses make decisions about pricing, managing expenses, and determining profitability by predicting how changes in sales volume will impact profits. |
| What is the difference between fixed and variable costs in decision-making? | Fixed costs remain constant regardless of sales or production levels, while variable costs change based on activity levels. This distinction helps in determining how many units or customers are needed to cover both types of costs. |
| What is Cost-Volume-Profit (C-V-P) Analysis? | C-V-P analysis helps determine how activity levels (e.g., number of customers or units produced) impact profits and is used to make decisions like setting prices and managing expenses. |
| What is the C-V-P formula? | The contribution margin (Revenue - Variable Costs) covers fixed costs. Once fixed costs are covered, any remaining margin becomes profit. |
| What are stepped costs? | Stepped costs are fixed costs that increase in steps when certain activity thresholds are reached. For example, additional staff may be required as customer numbers grow. |
| What are mixed costs? | Mixed costs contain both fixed and variable components. Examples include utility bills (with a fixed service charge and a variable charge based on usage) and car dealership rent (fixed rent plus a percentage of sales). |
| How do fixed costs behave as production increases? | Fixed costs remain the same in total, but the fixed cost per unit decreases as production increases, because the same total cost is spread over more units. |
| What is the relevant range for fixed costs? | The relevant range is the level of production or activity where fixed costs remain constant. Once production exceeds this range, fixed costs may increase. |
| How are variable costs represented graphically? | The graph of variable costs is a straight line that slopes upward, starting from the origin, showing that total variable costs rise in direct proportion to production volume. |
| How are fixed costs represented graphically? | The graph for fixed costs is a horizontal line, indicating that total fixed costs remain constant regardless of the number of units produced. |
| What happens to the fixed cost per unit as production increases? | The fixed cost per unit decreases as production increases because the total fixed cost is spread over more units. |
| What is a common example of mixed costs in business? | Sales compensation is a mixed cost, with a fixed salary plus a commission based on sales. |
| How is mixed cost analyzed? | Mixed costs are analyzed by separating the fixed and variable components. For example, a utility bill might have a fixed monthly fee plus a variable charge based on usage. |
| How do variable costs behave in C-V-P analysis? | Variable costs change in direct proportion to the number of units produced or sold. The more units produced, the higher the total variable costs. |
| What happens once fixed costs are covered in C-V-P analysis? | After fixed costs are covered, every additional sale contributes directly to profit because no more fixed costs need to be covered. |
| Why is understanding mixed costs important in business? | Mixed costs help businesses forecast expenses more accurately and plan for changes in activity levels, as they contain both fixed and variable components. |
| What happens to the total rent in the case of mixed costs? | The total rent in a mixed cost situation may have a fixed component (e.g., a flat rent amount) plus a variable component (e.g., a percentage of sales). |
| Which statement is true with respect to fixed and variable costs? | A fixed cost is fixed in total and decreases per unit as the number of units increases. |
| What is the relevant range? | The range of volume over which the variable cost per unit is expected to remain the same |
| Which statement below is true with regard to variable costs? | Total variable costs change in relationship to the volume of activity. |
| Which statement below is true with regard to fixed costs? | Total fixed costs do not change in total within a relevant range of activity. |
| What is the importance of allocating overhead costs? | Overhead costs must be paid by customers, not owners, to ensure business sustainability. Proper allocation supports accurate product pricing, profitability analysis, and resource planning. |
| What are direct costs? | Direct costs can be directly traced to a specific product, department, or service. Examples include raw materials, direct labor, and equipment used by one division. |
| What are indirect costs? | Indirect costs support multiple departments and are not directly traceable to a specific unit. Examples include corporate HQ rent, admin salaries, and shared IT infrastructure. |
| What is a cost center? | A cost center is responsible for costs only. Example: IT department. |
| What is a profit center? | A profit center is responsible for both costs and revenues. Example: Regional sales office. |
| What is an investment center? | An investment center is responsible for costs, revenues, and assets. Example: Company division. |
| What are the 4 key steps in the overhead accounting process? | Estimate & Set Rate (before the year starts) Record Actual Costs (during the year) Apply Overhead to Jobs (during the year) Reconcile & Adjust (at year-end) |
| What is the formula for calculating the Predetermined Overhead Rate (POHR)? | POHR = Estimated Overhead ÷ Estimated Activity Base |
| What is underapplied overhead? | Underapplied overhead occurs when actual overhead is greater than applied overhead. This can lead to underpricing and profitability issues. |
| What is overapplied overhead? | Overapplied overhead occurs when applied overhead is greater than actual overhead. This can lead to overpricing and a competitive disadvantage. |
| What is the goal in overhead allocation? | The goal is to minimize both underapplied and overapplied overhead through careful estimation and tracking. |
| What is the difference between direct and indirect costs? | Direct costs are traceable to a specific product or unit, while indirect costs are shared across multiple operations. |
| What is the difference between differential and sunk costs? | Differential costs change based on a decision, while sunk costs are already spent and irrelevant to future decisions. |
| What is the difference between out-of-pocket and opportunity costs? | Out-of-pocket costs are actual cash spent, while opportunity costs represent the value of the best alternative forgone. |
| What is an example of a business decision that involves analyzing direct costs? | Deciding whether to drop a product line involves analyzing direct costs and excluding irrelevant indirect costs. |
| What should be considered when entering a new market? | When entering a new market, differential costs and opportunity costs should be weighed. |
| What should be compared when deciding whether to outsource production? | Out-of-pocket costs and the long-term strategic impact should be compared. |
| What should be considered when accepting a special order? | Ensure the special order will cover variable and differential costs. |
| What should be considered when closing a division? | Determine which costs will go away and which will remain. |
| Why is overhead allocation important to managers? | It helps make smart, data-driven decisions, prevents pricing mistakes, allocates resources effectively, and ensures fair performance evaluation. |
| Why do companies allocate overhead costs based on estimated overhead numbers instead of actual numbers? | Because overhead costs must be allocated beginning the very first day of the period, but the actual numbers not available until the end of the period |
| What must be true of a direct cost? | It is a cost traceable to a specific business unit. |
| What must be true of an indirect cost? | It is a cost that cannot be traced to a specific business unit or product. |
| If overhead is underapplied during a period, which statement below is true? | The total cost of goods sold will be understated. |
| What is Contribution Margin (CM)? | Sales revenue minus variable costs; shows how much is available to cover fixed costs and profit. |
| What is the formula for Contribution Margin? | CM = Sales – Variable Costs |
| What business decisions use Contribution Margin? | Product profitability Outsourcing decisions Drop/keep product lines |
| What is a Contribution Margin Income Statement organized by? | Cost behavior (variable vs. fixed) |
| What is the Contribution Margin Income Statement used for? | Internal planning and forecasting |
| What is an example of break-even using Contribution Margin? | If CM per unit = $3,000 and fixed costs = $3,000,000 → break-even at 1,000 units |
| What is Cost-Volume-Profit (C-V-P) Analysis? | Analyzes how changes in cost, volume, and pricing affect profit |
| What is C-V-P analysis used for? | Profit forecasting Pricing strategy Cost planning |
| What is a key assumption in C-V-P analysis? | All costs are either fixed or variable |
| What is Break-Even Analysis? | Determines the sales level where total revenue equals total costs (zero profit) |
| What is the break-even formula in units? | Break-Even Units = Fixed Costs ÷ CM per Unit |
| What is Break-Even Analysis used for? | Risk assessment Goal setting Strategic decision-making |
| VW Beetle Example: What is the CM per car? | $15,000 (price) − $7,000 (variable cost) = $8,000 CM per unit |
| VW Example: What happens when sales double from 5 to 10 cars? | Profit increases by 167%, from $15,000 to $55,000 |
| Why use Contribution Margin Income Statements? | For internal use (shows sensitive cost data) Projects profit changes with volume Highlights fixed vs. variable costs Informs pricing, sales, and production decisions |
| How does a Regular Income Statement differ from a Contribution Margin Statement? | Regular: For external reporting, GAAP-compliant, by function CM Statement: For internal decisions, by cost behavior, not GAAP |
| Break-Even Example: How many VW Beetles to break even? | CM = $8,000 Fixed Costs = $25,000 Break-even: $25,000 ÷ $8,000 = 3.125 → Need to sell at least 4 cars |
| Why are CM, C-V-P, and Break-Even Analysis important? | Help set prices and sales goals Support budgeting and forecasting Critical for profitability Help entrepreneurs manage costs and plan launches |
| What are Differential Costs? | Future costs that change depending on the decision made (relevant, avoidable, or incremental). |
| Why are Differential Costs important? | They help evaluate options like outsourcing, special orders, or discontinuing products. |
| Give an example of a Differential Cost. | Cost to operate new equipment vs. old equipment. |
| What are Sunk Costs? | Past costs that have already been incurred and cannot be recovered. |
| Should sunk costs influence decisions? | No, they should be ignored in current decision-making. |
| Give an example of a Sunk Cost. | The purchase price of equipment bought in the past. |
| What are Out-of-Pocket Costs? | Actual cash outlays or use of resources that are easy to track. |
| Give an example of an Out-of-Pocket Cost. | Paying for new software or construction expenses. |
| What are Opportunity Costs? | The benefit lost by not choosing the best alternative. |
| Are Opportunity Costs recorded in accounting systems? | No, but they are critical for strategic decision-making. |
| Give an example of an Opportunity Cost. | Lost rental revenue from keeping land as a park. |
| Why are Opportunity Costs often missed? | No actual cash flow Not tracked in accounting Easy to overlook without strategic thinking |
| What cost types are most relevant in business decisions? | Differential and Opportunity Costs |
| What is an example of a Differential vs. Sunk Cost in a home sale? | Differential: Realtor fees, moving costs Sunk: Original purchase price of the house |
| What is a real-world Out-of-Pocket cost example (Central Park)? | Paying for landscaping, maintenance, and water management. |
| What is a real-world Opportunity Cost example (Central Park)? | Potential billions lost from not leasing park land commercially. |
| In cost classifications, what is a Fixed Cost? | Stays constant regardless of volume (e.g., rent, salaries) |
| What is a Variable Cost? | Changes with sales or production (e.g., materials, commissions) |
| What is a Product Cost? | Incurred during production (e.g., factory utilities, direct labor) |
| What is a Period Cost? | Incurred outside of production (e.g., office rent, admin salaries) |
| What is a Direct Cost? | Can be directly traced to a product (e.g., raw materials) |
| What is an Indirect Cost? | Shared across products or units (e.g., corporate overhead) |
| What makes a cost “relevant” in decision-making? | It must be future-oriented and change depending on the decision. |
| Summary Table: Which cost types involve cash? | Out-of-Pocket Costs |
| Summary Table: Which cost type is often ignored? | Opportunity Costs |
| Summary Table: Which cost types are in accounting records? | Out-of-Pocket Sunk Sometimes Differential |
| In a personal context, what is the Opportunity Cost of studying this lesson? | Whatever else you could be doing with your time. |
| What are differential costs? | Future costs that change as the result of a decision |
| What are sunk costs? | Past costs that cannot be changed by a current decision |
| What is an example of an indirect cost in a hospital? | Utility costs for the hospital building |
| What is Contribution Margin (CM)? | Revenue remaining after subtracting variable costs; used to cover fixed costs and profit. |
| What is the formula for Contribution Margin? | CM = Sales Revenue – Variable Costs |
| Give a CM example. | Sales = $5,000, Variable Costs = $2,000 → CM = $3,000 |
| What is the Break-Even Point? | Sales level where total revenue = total costs (Profit = $0) |
| Break-Even Formula (Units)? | Break-Even Units = Fixed Costs ÷ CM per Unit |
| Break-Even Example | Fixed Costs = $3,000,000, CM per Unit = $3,000 → Break-Even = 1,000 units |
| What is the Contribution Margin Ratio (CM Ratio)? | % of each sales dollar that remains after variable costs are covered. |
| CM Ratio Formula? | CM Ratio = Contribution Margin ÷ Sales Price |
| What is the standard CVP (Cost-Volume-Profit) equation? | Sales – Variable Costs – Fixed Costs = Profit |
| CVP in unit format? | (Price × Units) – (VC × Units) – Fixed Costs = Profit |
| CVP in ratio format? | Sales – (Variable Cost Ratio × Sales) – Fixed Costs = Profit |
| Target Income Formula (Units)? | (Fixed Costs + Target Income) ÷ CM per Unit |
| Shortcut: Break-Even in Dollars? | Fixed Costs ÷ CM Ratio |
| CM Formula in Practice? | CM = Sales Price – Variable Cost per Unit |
| Cost Behavior: Variable Costs? | Total increases with volume; per unit stays constant |
| Cost Behavior: Fixed Costs? | Total stays constant; per unit decreases with volume |
| Target Income Formula (Expanded)? | (Price × X) – (VC × X) – FC = Target Income |
| How to calculate Variable Cost Ratio? | VC ÷ Sales Price |
| Why use the CM Ratio? | Evaluate product profitability Guide pricing Allocate resources strategically |
| Why CM and CVP matter in business? | Set realistic sales targets Manage profitability Plan budgets and product launches |
| Which statement accurately describes managerial and financial accounting data? | Managerial accounting data are created based on competitive needs that are unique to the organization. |
| What are the three components of product costs? | Direct materials, direct labor, and manufacturing overhead |
| What is a mixed cost? | A cost that includes both a fixed portion and a variable portion |
| What problem will be caused if overhead is underapplied? | Total cost of products or orders will be understated. |
| What is an opportunity cost? | Revenue lost from selecting a different alternative |
| How is contribution margin calculated? | Sales minus variable cost |
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