Budgets
The usual budget period for most companies is:
An annual period into quarterly and monthly budgets.
A cost that changes as volume changes, but at a nonconstant rate, is called a _______________. A cost with a flat cost line within a relevant range that shifts to another level when volume significantly changes is a ________________________.
Curvilinear Cost; Step-Wise Cost
A method that estimates cost behavior by using just the highest and lowest volume levels is called the:
High-low method
A company's product sells at $11 per unit and has a $3 per unit variable cost. The company's total fixed costs are $98,000. The contribution margin per unit is:
$8.00;
$11.00 selling price - $3.00 variable cost per unit = $8.00
Maroon Company's contribution margin ratio is 30%. Total fixed costs are $90,000. What is Maroon's break-even point in sales dollars?
$300,000;
Break-even point in dollars = $90,000/0.30 = $300,000
The central guidance of the budget process is the responsibility of the _______________. Assuming a bottom-up process of budget development, the ______________ department should be initially responsible for developing sales estimates.
Budget Committee; The Sales Department
A cost that remains unchanged in total despite variations in volume of activity within a relevant range is a ___________________. A cost that changes in proportion to changes in volume of activity is a ________________________. A cost that includes both fixed and variable cost components is called a _________________.
Fixed Cost; Variable Cost; Mixed cost
A graph used to analyze past cost behaviors by displaying costs and unit data for each period as points on the diagram is called a:
Scatter diagram
Flannigan Company manufactures and sells a single product that sells for $550 per unit; variable costs are $250. Annual fixed costs are $800,000. Current sales volume is $4,200,000 Current sales volume is $4,200,000. Compute the contribution margin ratio.
36.4%;
$550 – $250 = $200/$550 = 36.4%
A company's product sells at $10 per unit and has a $3 per unit variable cost. The company's total fixed costs are $84,000. The break-even point in units is:
12,000 units; $84,000/($10-$3) = 12,000 units
The usual starting point for preparing a master budget is forecasting or estimating ___________. The master budget process usually ends with _____________________.
Sales; the budgeted balance sheet (could also be with a cash budget and budgeted financial statements).
Select cost information for Sea Biscuit Enterprises is as follows:
1,000 units of output 5,000 units of output
Total Cost/Unit Total Cost/Unit
Boxes $ 5,000 $ 5.00 $ 25,000 $ 5.00
Utilities expense $ 1,000 $ 1.00 $ 3,750 $ 0.75
Rent expense $ 4,000 $ 4.00 $ 4,000 $ 0.80
Based on this information Utilities expense is a _____________ cost and Boxes are a ______________ cost:
Utilities expense is a mixed cost and boxes are a variable cost.
A statistical method for identifying cost behavior is the:
Least-squares regression method.
During March, a firm expects its total sales to be $150,000, its total variable costs to be $100,000, and its total fixed costs to be $25,000. The contribution margin for March is:
$50,000;
Contribution margin = Sales - Variable costs; $150,000 - $100,000 = $50,000
If a firm's forecasted sales are $300,000 and its break-even sales are $250,000, the margin of safety in dollars is:
$50,000; $300,000 - $250,000 = $50,000
Budgets that are periodically revised and have new periods added to replace those that have lapsed are called _________________. The practice of preparing budgets for each of several future periods and revising those budgets as each period is completed, adding a new budget each period so that the budgets always cover the same number of future periods, is called _____________________
Rolling Budgets; Continuous Budgeting
4. The following information is available for a company's cost of sales over the last five months.
Month Units sold Cost of sales
January 500 $ 41,000
February 900 $ 47,000
March 1,700 $ 59,000
April 2,500 $ 71,000
Using the high-low method, the estimated total fixed cost is:
$33,500;
Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity); ($71,000 - $41,000)/(2,500 - 500) = $15.00 per unit;
Fixed cost = Total cost (high or low) - (variable cost per unit * hours (high or low); $71,000 - ($15 * 2,500) = $33,500; OR $41,000 - ($15 * 500) = $33,500
An important tool in predicting the volume of activity, the costs to be incurred, the sales to be made, and the profit to be earned is:
Cost-volume-profit analysis.
Management anticipates fixed costs of $80,000 and variable costs equal to 45% of sales. What will pretax income equal if sales are $400,000?
$140,000;
Pretax income = $400,000 - ((45% * $400,000) + $80,000) = $140,000
A product sells for $400 per unit, and its variable costs are 60% of sales. The fixed costs are $620,000. What is the break-even point in sales dollars?
$1,550,000; Contribution margin ratio = ($400 - $240)/$400 = 40%; Break-even point in sales dollars = $620,000/0.40 = $1,550,000
In a company that employs continuous budgeting on a quarterly basis and has an accounting period that ends December 31 of each year, what period would the first revision and update to the January through December 2017 budget cover?
April 2017-March 2018
Santora Company reports total contribution margin of $60,000 and pretax net income of $10,000 for the current month. The degree of operating leverage is:
6.0;
Degree of operating leverage = Total contribution margin/Pretax net income $60,000/$10,000 = 6
5. The following information is available for a company's utility cost for operating its machines over the last four months.
Month Machine hours Utility cost
January 900 $ 5,350
February 1,700 $ 6,800
March 2,300 $ 8,000
April 800 $ 3,500
Using the high-low method, the estimated variable cost per unit for utilities is:
$3.00;
Variable cost per unit = Change in cost/change in units (using highest and lowest level of activity); ($8,000 - $3,500)/(2,300 - 800) = $3.00 per unit
Watson Company has monthly fixed costs of $65,000 and a 40% contribution margin ratio. If the company has set a target monthly income of $15,000, what dollar amount of sales must be made to produce the target income?
$200,000;
(Fixed costs + Target income)/Contribution margin ratio = Dollar sales at target income;
($65,000 + $15,000)/.40 = $200,000 Sales
Use the following information to determine the break-even point in units (rounded to the nearest whole unit):
Unit sales 40,000 Units
Unit selling price $ 15.50
Unit variable cost $ 7.50
Fixed costs $ 225,000
28,125;
Break-even point in units = Fixed costs/Contribution margin per unit; $225,000/($15.50 - $7.50) = 28,125 units