theoretical questions and answers

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DISCUSSION QUESTIONS AND SUGGESTED ANSWERS
– Chapter 3, 4, and 13
(Cornerstones of Managerial Accounting 3
rd
edition, Mowen et al, 2009)


Cost Cost Concepts and Classifications

DQ 3.1. Knowledge of cost behavior allows a manager to assess changes in costs
that result from changes in activity. This allows a manager to examine the effects
of choices that change activity. For example, if excess capacity exists, bids that at
least cover variable costs may be totally appropriate. Knowing what costs are
variable and what costs are fixed can help a manager make better bids and,
ultimately, better business decisions.

DQ 3.4. Some account categories are primarily fixed or variable. Even if the cost is
mixed, either the fixed component or the variable component is relatively small. As
a result, assigning all of the cost to either a fixed or variable category is unlikely to
result in large errors. For example, depreciation on property, plant, and equipment
is largely fixed. The cost of telephone expense for the sales office, if it consisted
primarily of long distance calls, could be seen as largely variable (variable with
respect to the number of customers).

DQ 3.5. Committed fixed costs are those incurred for the acquisition of long-term
activity capacity and are not subject to change in the short run. Annual resource
expenditure is independent of actual usage. For example, the cost of a factory
building is a committed fixed cost. Discretionary fixed costs are those incurred for

the acquisition of short-term activity capacity, the levels of which can be altered
quickly. In the short run, resource expenditure is also independent of actual activity
usage. Salaries of engineers is an example of such an expenditure.

DQ 3.7. Mixed costs are usually reported in total in the accounting records. How
much of the cost is fixed and how much is variable is unknown and must be
estimated.


CPV Analysis

DQ 4.2. The units sold approach defines sales vol-ume in terms of units of product
and gives answers in these same terms. The unit con-tribution margin is needed to
solve for the break-even units. The sales revenue ap-proach defines sales volume
in terms of revenues and provides answers in these same terms. The overall
contribution margin ratio can be used to solve for the break-even sales dollars.

DQ 4.3. Break-even point is the level of sales activity where total revenues equal
total costs, or where zero profits are earned.

DQ 4.4. At the break-even point, all fixed costs are covered. Above the break-even
point, only variable costs need to be covered. Thus, contribution margin per unit is
profit per unit, provided that the unit selling price is greater than the unit variable
cost (which it must be for break even to be achieved).

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DQ. 4.8. Packages of products, based on the expected sales mix, are defined as a

single product. Selling price and cost information for this package can then be
used to carry out CVP analysis.

DQ 4.9. This statement is wrong; break-even analy-sis can be easily adjusted to
focus on tar-geted profit.

DQ 4.13. Operating leverage is the use of fixed costs to extract higher percentage
changes in prof-its as sales activity changes. It is achieved by increasing fixed
costs while lowering variable costs. Therefore, increased leverage implies
increased risk, and vice versa.

DQ 4.15. A declining margin of safety means that sales are moving closer to the
break-even point. Profit is going down, and the possibility of loss is greater.
Managers should analyze the reasons for the decreasing margin of safety and look
for ways to increase revenue and/or decrease costs.


Short-term Decision Making

DQ 13.2. Depreciation is an allocation of a sunk cost. This cost is a past cost and
will never differ across alternatives.

DQ 13.3. The salary of the supervisor of an assembly line with excess capacity is
an example of an irrelevant future cost for an acceptorreject decision.

DQ 13.6. A complementary effect is the loss of revenue on a secondary product
when the primary product is dropped. Thus, complementary effects may make it
more expensive to drop a product.

DQ 13.8. No. Joint costs are irrelevant. They occur regardless of whether the

product is sold at the splitoff point or processed further.

DQ 13.10. No. If a scarce resource is used in producing the two products, then the
product providing the greatest contribution per unit of scarce resource should be
selected. For more than one scarce resource, linear programming may be used to
select the optimal mix.

DQ 13.11. If a firm is operating below capacity, then a price that is above variable
costs will increase profits.