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Final Revision Questions Theory questions with answers that could be given in the final exam. Easy review of main topics and excellent for those who don't understand the theory (non-numerical) part of the course. From Summer 2010.

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Kathy Falk

1. Discuss five assumptions that underlie breakeven and cost-volume-profit analysis. (5 marks) a. The company is operating within the relevant range of activity specified in determining the revenue and cost information. b. All variable cost and revenue behaviour patterns are constant per unit and linear within the relevant range. c. Total fixed cost is a constant amount within the relevant range. d. Mixed costs can be accurately separated into their fixed and variable elements. e. Sales and production are equal; thus, there are no material fluctuations in inventory levels. f. In a multi-product firm, the sales mix will remain constant. g. There is no inflation. h. Labour productivity, production technology, and market conditions will not change during the period under consideration. 2. What is the importance of the contribution margin in relationship to CVP analysis? Give two (2) examples/combination of factors of how profits can be improved as discussed in class. (5 marks) CVP analysis seeks the most profitable combination of VC, FC, SP, and sales volume. Profits can sometimes be improved by reducing the CM if fixed costs can be reduced by a greater amount. The way to improve profits is to increase the total CM. Sometimes this can be done by reducing the SP and thereby increasing volume; sometimes it can be done by increasing the FC (such as advertising) and thereby increasing volume; sometimes it can be done by trading off VC and FC with appropriate changes in volume. Many other combinations of factors are possible. 3. The audited financial statements are prepared using Absorption costing (which is still GAAP). However, for evaluation of performance Variable (Direct) Costing is a better measure. Absorption costing motivates overproduction because this will increase profits. The reason this occurs is that manufacturing fixed costs are treated as a product cost. Therefore, when production is greater than sales, profit under absorption costing is greater because part of the manufacturing fixed costs remain in inventory. When variable costing is used, all manufacturing (and selling & admin) fixed costs are expensed in the period in which they are incurred. Under variable costing, profits are a function of sales only. Under absorption costing, profits are a function of production and sales. 4. Standards can be either ideal or practical. Theoretically either can be used as the framework for the budgeting process. What is the major distinction, if any, between a standard amount and a budgeted amount? Which standard, ideal or practical, provides the better benchmark for evaluating subsequent performance in a budgeting system? Explain. One major distinction between a standard amount and a budgeted amount is the unit of measurement. A standard is a unit concept. It is often quoted on per unit basis, for example, standard quantity of input for a unit of output, standard cost per unit of input or standard cost per unit of output. A budgeted amount is a total concept. For example, when businesses talk of budgeted labour costs, they often mean the total budgeted labour costs, not budgeted labour cost per unit of product. Practical standards should normally provide better benchmarks for evaluating subsequent performance because they are attainable through reasonable (although highly efficient) efforts by the average worker. Such standards generally will elicit positive motivation from workers. Ideal standards, on the other hand, tend to discourage even the most diligent workers and as such may have no motivational value 5. Advantages of Budgeting: Define goals and objectives Think about and plan for the future Means of allocating resources Uncover potential bottlenecks Coordinate activities Communicate plans 6. Advantages of Participatory or Self Imposed Budget: Individuals at all levels are recognized as members of the team whose views and judgements are valued by top management More reliable and more accurate Motivation is generally higher Create the commitment to attaining the goal Easier for those who set them to understand or meet them Manager cannot say that the budget was unrealistic and impossible to meet, i
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