STUDY GUIDE TEST 2 ACCOUNTING
STUDY GUIDE TEST 2 ACCOUNTING Acct 20353
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This 5 page Study Guide was uploaded by Nicole Salem on Wednesday April 20, 2016. The Study Guide belongs to Acct 20353 at Texas Christian University taught by Cynthia Hanes in Spring 2016. Since its upload, it has received 21 views. For similar materials see Fundamentals Of Accounting I in Accounting at Texas Christian University.
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Date Created: 04/20/16
Questions for Chapter 2 Hilton 1. What is the difference between product costs and period costs? A product cots is a cost assigned to goods that were either purchased or manufactured for resale. The product cost is used to value the inventory of manufactured goods or merchandise until the goods are sold. Period costs are identified with the period of time in which they are incurred rather than with units of purchased or produced goods. Period costs are recognized as expenses during the time period in which they are incurred. 2. What are the differences between a jobshop production process and a continuous flow production process? In jobshop production process there is low production volume, little standardization, oneofa kind products. In a continuous production process there is high production volume, highly standardized commodity products. 3. What are three types of manufacturing costs? Direct Material: raw material that is consumed in the manufacturing process, is physically incorporated in the finished product, and can be traced to products relatively easily. Direct Labor: the costs of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products. Manufacturing overhead: all other costs of manufacturing and it includes three types: indirect material, indirect labor, and other manufacturing costs. 4. How do costs flow through the accounting system as a product is manufactured and sold? Product costs are stored in inventory until the manufacturer’s products are sold. As direct material is consumed in production, the cost is added to workinprocess inventory. When products are finished, the costs are transferred from workinprocess inventory to finishedgoods inventory. 5. What are fixed and variable costs? How do they change in total and on a perunit basis as more units are produced? Variable cost changes in total in direct proportion to a change in the level of activity. A fixed cost remains unchanged in total as the level of activity varies. As activity level increases, total fixed costs remains constant, but unit fixed cost declines. As activity changes, the total variable cost increases or decreases proportionately with the activity change, but unit variable cost remains the same. 6. How do the cost terms in the chapter apply to service firms? Costs that vary directly with activity are variable costs. Any cost that do not tend to vary with service activity are fixed costs. Direct costs of service include the parts and supplies used and the wages of the service technicians. The indirect costs include the building, and advertising etc. Costs are stored in inventory as product costs until the time period when they are consumed in the repair process. Questions for Chapter 7 Hilton 1. How can we use the contribution margin (CM) approach to find the breakeven point? We can use the contribution margin approach to find the breakeven point with the formula: Fixed expenses / unit contribution margin = breakeven point (in units) If you want to find out the breakeven point in sales dollars rather than units you use the formula: Fixed expenses/ (unit contribution margin / unit sales price) = breakeven point in sales dollars 2. How can we use the equation approach to find the breakeven point? Income (or profit) is equal to sales revenue minus expenses. The equation is: Sales revenue – variable expenses – fixed expenses= profit 3. How do we prepare a CVP graph? 1) Draw the axes of the graph. Label the vertical axis in dollars and the horizontal axis in unit of sales. 2) Draw the fixedexpense line. It is parallel to the horizontal axis, since fixed expenses do not change with activity. 3) Compute total expenses at any convenient volume. 4) Draw the totalexpense line. 5) Compute total sales revenue at any convenient volume. 6) Draw the total revenue line. 7) Label the graph 4. How does the calculation of a target net profit alter the CM approach and the equation approach that we used to find the breakeven point? The new calculation for the CM approach with the target net profit is: (Fixed expenses + target net profit) / Unit contribution margin = number of sales units required to earn target net profit For finding it with dollar sales instead of units, the formula is: (Fixed expenses + target net profit) / Contribution margin ratio = dollar sales required to earn target net profit The equation approach is altered as following: [(unit sales price) x (sales volume required to earn target net profit)] – [(unit variable expense) x (sales volume required to earn target net profit)] – (fixed expenses) = target net profit 5. When a company has multiple products, how do we use the relative sales mix to compute the breakeven point? The sales mix is used to compute a weightedaverage unit contribution margin. That is the average of the several products’ unit contribution margin, weighted by the relative sales proportion of each product. The breakeven point in units uses the following formula: Breakeven point= fixed expenses/ weightedaverage unit contribution margin. 6. What assumptions underlie CVP analysis? 1) The behavior of total expenses is linear (straightline) over the relevant range. This implies the following more specific assumptions: a. Expenses can be categorized as fixed, variable, or semi variable. Total fixed expenses remain constant as activity changes, and the unit variable expense remains unchanged as activity varies. b. The efficiency and productivity of the production process and workers remains constant 2) The behavior of total revenues is linear. This implies that the price of the product or service will not change as sales volume varies within the relevant range. 3) In multiproduct organizations, the sales mix remains constant over the relevant range. 4) In manufacturing firms, the inventory levels at the beginning and end of the period are the same. The number of units produced during the period equals the number of units sold. 7. What is a contribution income statement and what are the benefits of a contribution income statement? The contribution income statement separates the fixed and variable expenses, and this highlights costvolumeprofit relationships. It benefits because it is readily apparent from the contribution format statement how income will be affected when sales volume changes by a given percentage. 8. What is operating leverage and how does it affect the breakeven point? The extent to which an organization uses fixed costs in its cost structure is called operating leverage. You can measure a firm’s operating leverage at a particular sales volume with: Operating leverage factor = contribution margin / net income Operating leverage affects a firm’s breakeven point. Since a firm with relatively high operating leverage has proportionally high fixed expenses, the firm’s breakeven point will be relatively high. Questions for Chapter 7 To be discussed in class 1. What are the different types of inventory? The different types of inventory are: Raw materials inventory: items acquired for processing into finished goods Merchandise inventory: goods held for sale in the normal course of business Work in process inventory: goods in the process of being manufactured but not yet complete Finished goods inventory: manufactured goods that are complete and ready for sale 2. What is the relationship between inventory and cost of goods sold? The relationship can be shown through the equation: Cost of goods sold= beginning inventory + purchases of merchandise during the year – ending inventory 3. What are the four inventory costing methods? I. Specific Identification Method: this method identifies the cost of the specific item that was sold II. LIFO ( Last in , firstout) method: assumes that the most recent purchased unit are the ones that are sold first III. FIFO (first in, firstout) method: assumes that the first goods purchased are the first goods sold IV. Average cost method: uses the weighted average unit cost of the goods available for sale for cost of goods sold and ending inventory 4. When prices are rising, which inventory method yields the highest cost of goods sold/lowest net income? When prices are rising, the LIFO or lastin, firstout method is the one that lower net income. 5. What is the lower of cost or market (LCM) rule? Lower of cost or market is a valuation method departing from the cost principal. The LCM rule serves to recognize a loss when replacement cost or net realizable value drops below cost. 6. How do changes in inventory affect cash flow from operations? If there is an increase in net inventory: you purchased more and that increase must be subtracted from the amount of cash flow from operations. If there is a decrease in net inventory: you sold instead of purchasing, and this decrease in inventory must be added to the amount of cash flow from operations. 7. What are the effects of errors in ending inventory? If the error causes the cost of goods sold to be overstated, then the income before taxes would also be understated for the next year, and the inventory would be greater. If the error causes the cost of goods sold to be understated, then the income before taxes would be overstated in the next year and the inventory would be less.
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