Managerial Accounting Exam 2

What is the main difference between absorption and variable costing?

Absorption treats fixed MOH as a product cost; Variable treats it as a period cost.

When do absorption and variable costing produce the same operating income?

When units produced equal units sold.

Which costing method is required by GAAP?

Absorption costing.

Which costing method uses the contribution margin income statement format?

Variable costing.

What is the formula for contribution margin per unit?

Sales price minus variable cost per unit.

What is the break-even formula in units?

Fixed expenses divided by contribution margin per unit.

What is the break-even formula in dollars?

Fixed expenses divided by contribution margin ratio.

How do you calculate the contribution margin ratio?

Contribution margin per unit divided by sales price.

How do you calculate margin of safety in dollars?

Actual or budgeted sales minus break-even sales.

What is the formula for degree of operating leverage?

Contribution margin divided by operating income.

What does a high operating leverage mean?

Higher fixed costs, higher risk, higher reward.

What does a low operating leverage mean?

Lower fixed costs, lower risk, more stable.

What is the high-low method used for?

Estimating variable and fixed cost components of a mixed cost.

What is the cost formula used in high-low method?

Y = a + bX (where a is fixed cost, b is variable cost per unit).

What is R-squared (R²) in regression analysis?

A measure of how well the line fits the data (goodness of fit).

What are the two criteria for a cost to be relevant?

It must occur in the future and differ between alternatives.

Are sunk costs relevant?

No, because they’ve already been incurred.

What is an opportunity cost?

A benefit lost when one alternative is chosen over another.

What are avoidable costs?

Costs that can be eliminated by choosing one option over another; relevant.

What are unavoidable costs?

Costs that will be incurred regardless of the decision; not relevant.

What do you analyze in a "drop a segment" decision?

If the segment’s contribution margin covers traceable fixed costs.

When should a company accept a special order?

If it has excess capacity and the price exceeds variable cost.

In a make-or-buy decision, what costs should be compared?

Avoidable (relevant) costs vs. purchase price.

What is the best way to allocate constrained resources?

Prioritize products with highest contribution margin per unit of the constraint.

When should a company process further instead of selling as-is?

If the additional revenue is greater than the additional cost.

What is target costing used for?

Setting cost limits for price-takers to ensure desired profit.

What is cost-plus pricing used for?

Setting prices based on cost plus desired profit for price-setters.

What are the product costs under variable costing?

Direct materials, direct labor, and variable manufacturing overhead.

What are the product costs under absorption costing?

Direct materials, direct labor, variable MOH, and fixed MOH.

What’s the formula for target sales in units?

(Fixed costs + Target operating income) divided by CM per unit.

What’s the formula for target sales in dollars?

(Fixed costs + Target operating income) divided by CM ratio.