ACCT1022 Lecture Notes - Lecture 2: Finished Good, Retained Earnings, Marginal Cost

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16 Feb 2017

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How does a firm create value for its shareholders: by growing retained earnings via effective management of assets and liabilities, the key goal: keep earning profits. To do that you have to take good strategic decisions (manage your opportunity costs well), and remain competitive. This in turn requires you to understand and manage: how/what costs are being incurred and, how these costs flow through the value chain. We will be careful with terminology: an expense is a cost that is recognized on the income statement as having been incurred to generating revenue in that period. Not all costs are expenses but all expenses are costs. A cost is a sacrifice made to achieve a particular purpose. Out of pocket costs v. opportunity costs. Given the various types of costs, the firm has to decide how to track these various costs in its internal records.

Related Questions

Please help me answer the following questions:
1. Management accounting:
A) is both retrospective, providing feedback about past operations,and also prospective, incorporating forecasts and estimates aboutfuture events.
B) is primarily oriented to external stakeholders.
C) must be consistent with rules formulated by the FinancialAccounting Standards Board (FASB).
D) provides information that is generally available only on aquarterly or annual basis.

2. Management accounting information is BEST described as:
A) providing a signal that something is wrong.
B) identifying and helping to explain what is wrong.
C) simply summarizing information, but giving no indication thatanything is wrong.
D) measuring overall organizational performance.

3. Which of the following would be MOST helpful for a top managerof a company?
A) profitability report of the company
B) information to monitor hourly and daily operations
C) number of customer complaints
D) operating expense summary reported by department

4. The Balanced Scorecard is said to be "balanced" because itmeasures:
A) short-term and long-term objectives.
B) financial and nonfinancial objectives.
C) internal and external objectives.
D) All of the above are correct.

5. The ________ perspective of the Balanced Scorecard asks, "How issuccess measured by our shareholders?"
A) learning and growth
B) customer
C) financial
D) shareholder

6. Defect rates for products and yield percentages in manufacturingare measures of quality included in the ________ perspective of theBalanced Scorecard.
A) financial
B) production
C) process
D) internal

7. The purpose of the Balanced Scorecard is BEST described ashelping an organization:
A) develop customer relations.
B) mobilize employee skills for continuous improvements inprocessing capabilities, quality, and response times.
C) introduce innovative products and services desired by targetcustomers.
D) translate an organization's mission, vision, and strategy into aset of performance measures that help to implement thestrategy.

8. The FIRST step in developing strategic objectives for theBalanced Scorecard is:
A) defining the long-run financial objectives.
B) identifying the target customer.
C) articulating the organization's vision.
D) select objectives for the customer value proposition.

9. Identify the BEST description of the Balanced Scorecard'scustomer perspective. To achieve our firm's vision andstrategy:
A) How do we lower costs?
B) How do we motivate employees?
C) How can we obtain greater profits?
D) How does the company intend to attract, retain, and deepenrelationships with targeted customers by differentiating itselffrom competitors?

10. Fixed costs:
A) may be either direct or indirect costs.
B) vary with production or sales volume.
C) include parts and materials used to manufacture a product.
D) can be adjusted in the short run to meet actual demands.

11. Which of the following describes a variable cost?
A) Variable cost are always indirect costs.
B) Variable costs increase in total when the actual level ofactivity increases.
C) Variable costs include most personnel costs and depreciation onmachinery.
D) Variable costs can always be traced directly to the costobject.

12. Cost-volume-profit analysis is used PRIMARILY bymanagement:
A) as a planning tool.
B) for control purposes.
C) to establish a target net income for next year.
D) to attain extremely accurate financial results.

13. The break-even point is the level at which revenues:
A) equal fixed costs.
B) equal variable costs.
C) equal fixed costs minus flexible costs.
D) equal variable costs plus fixed costs.

14. Cost-volume-profit analysis assumes all of the followingEXCEPT:
A) all costs are purely variable or fixed.
B) units manufactured equal units sold.
C) total variable costs remain the same over the relevantrange.
D) total fixed costs remain the same over the relevant range.

CASE 5A -- GLASER HEALTHPRODUCTS

Glaser HealthProducts of Ranier Falls, Georgia, is organized functionally intothree divisions: Operations, Sales, and Administrative. Purchasing,receiving, materials and production control, manufacturing, factorypersonnel, inventory stores, and shipping activities are under thecontrol of the vice-president for operations, George Gottlieb.Advertising, market research, and sales are the responsibility ofthe vice-president for sales, Jake Bogan. Accounting, budgeting,the firm's computer center, and general office management aredelegated to the corporate controller (Administrative), CharlieKaplan. The following cost categories are found in the company as awhole: (a) Depreciation on factory equipment. (b) Depreciation onoffice equipment. (c) Depreciation on factory building. (d)Advertising manager's salary. (e) Assembly foreman's salary. (f)Salespersons' salaries. (g) Salespersons' travel expenses. (h)Supplies for the Machining Department. (i) Advertising suppliesused. (j) Electricity for the Assembly Department. (k) Lostmaterials (scrap) in a Machining Department. (l) Direct labor inthe Assembly Department. (m) Supplies for the sales office. (n)Sales commissions. (o) Packing supplies. (p) Cost of hiring newemployees. (q) Payroll fringe benefits for workers in the ShippingDepartment. (r) Supplies for Production Scheduling. (s) Cost ofrepairing parts improperly manufactured in the MachiningDepartment. (t) Paint for the Assembly Department. (u) Heat, light,and power for the factory. (v) Leasing of computer equipment forthe Accounting Department.

Question: Gaser Health Products is interested in using activity-based costingto identify as many costs as possible with the products. Thesecosts will be used for planning and control decisions rather thanfor inventory valuation. The controller decided that all operationcosts will be related to products but only those sales andadministrative costs that are classified as unit-level,batch-level, or product-level costs should be related to products.Using preliminary stage cost drivers, explain how individual itemsof costs will be traced to activitygroupings.

periwinkleporpoise604

	#1	Which of the following correctly describes fixed and variable cost behavior as total volume increases?
	A.	Unit fixed costs stay the same and unit variable costs increase.
	B.	Total fixed costs stay the same and total variable costs increase.
	C.	Unit fixed costs decrease and total variable costs decrease.
	D.	Unit fixed costs decrease and unit variable costs decrease.

	#2	The incremental profit generated by the sale of one additional unit is equal to the
	A.	contribution margin per unit.
	B.	selling price.
	C.	margin of safety.
	D.	incremental cost.

	#3	Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?
	A.	$15.25
	B.	$21.35
	C.	$19.60
	D.	$27.44

	#4	ABC company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus 20% for pricing, which of the following should the company use to determine the price?
	A.	The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units.
	B.	The company should use a unit cost of $8.70 at any volume level.
	C.	The company should use a unit price of $10.44 at any volume level.
	D.	The company should ignore fixed costs for cost-plus pricing.

	#5	Which of the following is a grouping of overhead costs whose total is allocated using one allocation base?
	A.	Cost objective
	B.	Cost pool
	C.	Direct cost
	D.	Cost driver

	#6	Which one of the following is the preferred alternative when deciding between two options?
	A.	Incremental profit is greater than under the other alternatives.
	B.	Revenues are greater than under the other alternatives.
	C.	Expenses are less than under the other alternatives.
	D.	No opportunity or sunk costs exist.

#7	The required rate of return used to calculate an investmentâs net present value is related to the firmâs
A.	contribution margin.
B.	cost of capital.
C.	total assets.
D.	Price/Earnings ratio.

#8	A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department?
A.	A variable cost and therefore relevant
B.	Avoidable and therefore incremental
C.	Sunk and therefore not relevant
D.	A fixed cost and therefore not relevant

#9	The following information relates to Ajax Widgets during the year. There was no beginning inventory.
	Units produced	11,000
	Units sold	10,000
	Units in ending inventory	1,000
	Fixed manufacturing overhead	$220,000
	How much fixed manufacturing overhead will be expensed during the year (included in Cost of Goods Sold) using full costing?
A.	$220,000
B.	$200,000
C.	$20,000
D.	$10,000

#10	If the required rate of return is greater than the internal rate of return of a potential investment, the company should judge the investment as acceptable.
A.	This is a True statement
B.	This is a False statement
C.	Not enough information provided.

#11	The basic concept involved in time value of money calculations is that
A.	it is better to receive a dollar in the future than to receive a dollar today
B.	incremental revenues must exceed incremental costs.
C.	it is better to receive a dollar today than to receive a dollar in the future.
D.	it can only be applied to positive cash flows

#12	Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows:
		Footballs	Basketballs	Bats	Total
	Sales	$600,000	$800,000	$400,000	$1,800,000
	Cost of goods sold	260,000	400,000	230,000	890,000
	Gross margin	340,000	400,000	170,000	910,000
	Less other variable costs	85,000	120,000	80,000	285,000
	Contribution margin	255,000	280,000	90,000	625,000
	Less direct salaries	50,000	60,000	45,000	155,000
	Less common fixed costs	85,000	100,000	55,000	240,000
	Net income	$120,000	$120,000	-$10,000	$230,000

	Since the profit for bats is a net loss, the company is considering dropping this product line. What is the incremental $ effect on total net income of dropping the Bats line?


#13	Right Air Supply sells a specialized air filter that has a variable cost of $10 each.
	Fixed costs are estimated to be $700,000 across all levels of sales shown below.
	Units Sold	Unit Price	CM per unit x Qty	Fixed Costs	Profit
	90,000	$33		700,000
	100,000	$31		700,000
	110,000	$30		700,000
	120,000	$28		700,000
	Which price should Right Air Supply charge to maximize profits?


#14	Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the companyâs margin of safety?


#15	Roger Excavating Company experienced the following costs in 2016:
	Direct materials	$1.75 per unit
	Direct labor	$2.00 per unit
	Variable manufacturing overhead	$2.50 per unit
	Variable selling	$0.75 per unit
	Fixed manufacturing overhead	$50,000
	Fixed selling	$15,000
	Fixed administrative	$5,000
	During 2016, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the companyâs contribution margin per unit?

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ACCT1022 Lecture Notes - Lecture 2: Finished Good, Retained Earnings, Marginal Cost

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