MAS Long Quiz

What are the three basic manufacturing cost categories?

1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead

Define Direct Materials.

Raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it (eg a radio in a car).

Define Direct Labor.

Labor costs that can be easily traced to individual units of product (eg wages of assembly line workers).

Define Manufacturing Overhead.

All manufacturing costs except direct materials and direct labor; costs that cannot be easily traced to specific units.

What are the two types of Nonmanufacturing Costs?

1. Selling Costs (to secure and deliver orders) 2. Administrative Costs (executive and organizational costs).

Distinguish between Product Costs and Period Costs.

Product costs attach to units of inventory (DM; DL; MOH); Period costs are expensed in the period incurred (Selling and Admin).

What is the formula for Prime Cost?

Direct Materials + Direct Labor

What is the formula for Conversion Cost?

Direct Labor + Manufacturing Overhead

Define Variable Cost behavior.

Total variable cost increases/decreases in proportion to changes in activity but variable cost per unit remains constant.

Define Fixed Cost behavior.

Total fixed cost remains constant regardless of activity levels but fixed cost per unit decreases as activity increases.

What is a Mixed Cost?

A cost that contains both variable and fixed cost elements (eg a utility bill with a flat base fee plus a usage charge).

What is the High-Low Method formula for variable cost per unit?

(Cost at High Activity - Cost at Low Activity) / (High Activity Level - Low Activity Level)

What is the Relevant Range?

The range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.

Define Opportunity Cost.

The potential benefit that is given up when one alternative is selected over another.

Define Sunk Cost.

A cost that has already been incurred and cannot be changed by any decision made now or in the future; it should be ignored in decision making.

What is the Contribution Margin?

The amount remaining from sales revenue after variable expenses have been deducted (Sales - Variable Expenses).

What is the Break-even Point?

The level of sales at which profit is zero; where Total Contribution Margin equals Total Fixed Expenses.

How do you calculate the Contribution Margin (CM) Ratio?

Total Contribution Margin / Total Sales (or Unit CM / Unit Selling Price).

What is the formula for Unit Sales to Break Even?

Fixed Expenses / Unit Contribution Margin

What is the formula for Dollar Sales to Break Even?

Fixed Expenses / CM Ratio

What is the formula for Unit Sales to attain a Target Profit?

(Target Profit + Fixed Expenses) / Unit Contribution Margin

Define Margin of Safety.

The excess of budgeted or actual sales dollars over the break-even volume of sales dollars.

What is Operating Leverage?

A measure of how a percentage change in sales volume will affect profits; calculated as Contribution Margin / Net Operating Income.

What is the difference between a Traditional Income Statement and a Contribution Format Income Statement?

Traditional organizes costs by function; Contribution organizes costs by behavior.

Define Differential Cost.

A difference in cost between two alternatives.

What are Indirect Costs?

Costs that cannot be easily and conveniently traced to a specific cost object (eg factory manager's salary for one specific product).

What is an Activity Base?

A measure of whatever causes the incurrence of a variable cost (eg machine hours or units produced).

Define Committed Fixed Costs.

Long-term fixed costs that cannot be significantly reduced even for short periods (eg real estate taxes).

Define Discretionary Fixed Costs.

Fixed costs that arise from annual decisions by management to spend on certain items (eg advertising).

What is the Least-Squares Regression Method?

A statistical method used to analyze mixed costs by fitting a line to data points to minimize the sum of squared errors.