Differential Analysis Chapter 7 Quiz
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Questions and Answers

What type of decision is typically evaluated using differential analysis?

  • Budgeting decisions
  • Financial investment decisions
  • Human resource decisions
  • Make-or-buy decisions (correct)

    • Direct fixed costs are often considered differential costs.

    True

    Define what is meant by an 'opportunity cost.'

    An opportunity cost is the potential benefit that is missed when one alternative is chosen over another.

    Differential analysis is primarily used in the evaluation of __________ decisions.

    <p>financial</p> Signup and view all the answers

    Match the following types of costs with their definitions:

    <p>Avoidable Cost = Costs that can be eliminated if a particular decision is made Allocated Fixed Cost = Costs that remain fixed regardless of the decision made Opportunity Cost = The benefit lost when one option is chosen over another Direct Fixed Cost = Fixed costs directly associated with a specific product or service</p> Signup and view all the answers

    Why are allocated fixed costs typically not considered differential costs?

    <p>They are unchangeable regardless of decisions.</p> Signup and view all the answers

    What are two important assumptions to consider when evaluating special order scenarios?

    <p>Capacity availability and incremental costs.</p> Signup and view all the answers

    Cost-plus pricing is a method that involves determining the cost of producing a product and adding a markup.

    <p>True</p> Signup and view all the answers

    What percentage of costs are fixed if a company has $150,000 in fixed costs and $50,000 in variable costs?

    <p>75%</p> Signup and view all the answers

    Absorption costing treats fixed manufacturing overhead as a period cost.

    <p>False</p> Signup and view all the answers

    What is the formula to convert target profit after tax to target profit before taxes?

    <p>Target profit before taxes = Target profit after tax ÷ (1 – tax rate)</p> Signup and view all the answers

    Variable costing allows managers to review contribution margin information, including the contribution margin ________.

    <p>ratio</p> Signup and view all the answers

    Why do companies analyze contribution margin per unit of constrained resource?

    <p>To maximize profit under resource constraints</p> Signup and view all the answers

    Match the costing method to its treatment of fixed manufacturing overhead:

    <p>Absorption Costing = Product Cost Variable Costing = Period Cost</p> Signup and view all the answers

    Variable costing prevents managers from increasing production merely to inflate profits.

    <p>True</p> Signup and view all the answers

    List two benefits of using variable costing for managers.

    <p>CVP analysis, contribution margin income statements</p> Signup and view all the answers

    What defines a fixed cost?

    <p>A cost that remains constant regardless of activity level.</p> Signup and view all the answers

    A committed fixed cost can be easily changed in the short run.

    <p>False</p> Signup and view all the answers

    Give two examples of variable costs.

    <p>Direct materials and direct labor</p> Signup and view all the answers

    The cost equation can be expressed as Y = __ + vX.

    <p>f</p> Signup and view all the answers

    Match the type of fixed cost with its description:

    <p>Committed Fixed Cost = Long-term leases and contracts Discretionary Fixed Cost = Can be changed without major impact Variable Cost = Total costs change with production Mixed Cost = Combination of fixed and variable costs</p> Signup and view all the answers

    Which of the following methods can be used to estimate fixed and variable costs?

    <p>High-low method</p> Signup and view all the answers

    Per unit variable costs do change with changes in activity.

    <p>False</p> Signup and view all the answers

    What are joint products?

    <p>Products that are generated simultaneously from the same process.</p> Signup and view all the answers

    The equation to estimate future costs is Y = f + v __.

    <p>X</p> Signup and view all the answers

    What could lead to inaccuracies when using the high-low method?

    <p>It focuses only on the highest and lowest activity levels.</p> Signup and view all the answers

    Mixed costs change in direct proportion to changes in activity.

    <p>False</p> Signup and view all the answers

    Describe the role of account analysis in estimating costs.

    <p>It involves reviewing accounts to separate fixed and variable cost components.</p> Signup and view all the answers

    Match the following term to its description:

    <p>Total Fixed Costs = Remain constant in total regardless of activity Per Unit Fixed Costs = Change inversely with activity levels Total Variable Costs = Change in total with activity level Per Unit Variable Costs = Constant regardless of activity levels</p> Signup and view all the answers

    Which of these costs can be categorized as a discretionary fixed cost?

    <p>Advertising expenses</p> Signup and view all the answers

    What is the primary purpose of calculating the break-even point?

    <p>To find the number of units that must be sold for zero profit</p> Signup and view all the answers

    The contribution margin ratio can change with fluctuations in the selling price per unit.

    <p>True</p> Signup and view all the answers

    What does margin of safety represent?

    <p>The excess of projected sales over the break-even point.</p> Signup and view all the answers

    The equation to calculate the break-even point in units is: (Total fixed costs + Target profit) ÷ (Selling price per unit - Variable cost per unit), where the denominator is known as the _______.

    <p>contribution margin per unit</p> Signup and view all the answers

    Which of the following is an example of a fixed cost?

    <p>Equipment depreciation</p> Signup and view all the answers

    The contribution margin per unit is the same as the contribution margin ratio.

    <p>False</p> Signup and view all the answers

    What is sensitivity analysis used for in cost-volume-profit analysis?

    <p>To show how changes in model variables affect profit.</p> Signup and view all the answers

    To find the break-even point in sales dollars, the equation is: (Total fixed costs + Target profit) ÷ _______.

    <p>Contribution margin ratio</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Fixed Costs = Costs that do not change with activity level Variable Costs = Costs that vary with the level of production Break-even Point = Point where total revenues equal total costs Contribution Margin Ratio = Percentage representing the contribution of each sales dollar to covering fixed costs</p> Signup and view all the answers

    Which of the following statements about target profit is correct?

    <p>Target profit can be expressed in both units and sales dollars.</p> Signup and view all the answers

    Cost structures only include variable costs.

    <p>False</p> Signup and view all the answers

    What changes in the break-even equation for a company with multiple products?

    <p>The denominator uses the weighted average contribution margin per unit.</p> Signup and view all the answers

    In CVP analysis, the assumption that costs can be separated into fixed and _______ components is crucial.

    <p>variable</p> Signup and view all the answers

    What may prompt a manager to decide against introducing a new product?

    <p>Low margin of safety</p> Signup and view all the answers

    What is the purpose of the scattergraph method?

    <p>To estimate costs based on data points</p> Signup and view all the answers

    The scattergraph method requires that a line touches all data points.

    <p>False</p> Signup and view all the answers

    What is referred to as 'outliers' in the scattergraph method?

    <p>Unusual data points</p> Signup and view all the answers

    The profit equation is: Profit = Total sales – Total variable costs – Total _____.

    <p>fixed costs</p> Signup and view all the answers

    Which of the following describes the term 'relevant range'?

    <p>The level of activity for accurate cost estimates</p> Signup and view all the answers

    Variable costs remain constant regardless of the level of activity.

    <p>False</p> Signup and view all the answers

    How is the variable cost per unit calculated in the scattergraph method?

    <p>By solving for variable cost in the equation using total fixed costs and the data point.</p> Signup and view all the answers

    Regression analysis provides total fixed costs (f) and variable cost per unit (v) output in the form of the equation Y = ____ + vX.

    <p>f</p> Signup and view all the answers

    Match the following types of statements to their purposes:

    <p>Contribution margin income statement = Internal reporting with fixed and variable costs Traditional income statement = External reporting with functional area costs Scattergraph method = Graphical cost estimation technique Regression analysis = Mathematical fitting of data points</p> Signup and view all the answers

    Which of the following costs can behave in a nonlinear way?

    <p>Direct materials costs</p> Signup and view all the answers

    The contribution margin is calculated by adding variable costs to sales.

    <p>False</p> Signup and view all the answers

    What is the role of the line drawn during the scattergraph method?

    <p>To estimate fixed and variable costs by fitting closely to the data points.</p> Signup and view all the answers

    The equation for profit can be expressed as: Profit = Total sales - Total ____ - Total fixed costs.

    <p>variable costs</p> Signup and view all the answers

    What do accountants use to assess the reasonableness of data points in the scattergraph method?

    <p>Computer programs like Excel</p> Signup and view all the answers

    Costs can remain fixed outside of the relevant range.

    <p>False</p> Signup and view all the answers

    Study Notes

    Differential Analysis Model

    • This model organizes data to aid in various business decisions.
    • Common applications include: make-or-buy decisions, product-line decisions, customer retention, and special orders.

    End-of-Chapter Questions (Chapter 7)

    • These questions facilitate self-assessment of learning.
    • Answers will be provided in a separate section.
    • Students should create a dedicated "End-Of-Chapter Questions" section in the learning journal for answers.
    • These questions are not graded but support learning and aid understanding of the material.
    • Comparing answers with the correct answers reinforces learning and improves performance in graded quizzes and exams.

    Differential Revenues and Costs

    • Differential revenues and costs are the changes in revenues and costs relevant to decision-making.

    Differential Analysis

    • Differential analysis is a decision-making technique focusing on relevant revenues and costs.

    Make-or-Buy Decisions

    • These decisions involve choosing whether to produce a good internally or outsource it.
    • Differential analysis helps in evaluating relevant costs and benefits.

    Avoidable Cost

    • An avoidable cost is a cost that can be eliminated by a specific decision.

    Product Line Decisions

    • Differential analysis helps in deciding which product lines to continue or discontinue.

    Direct Fixed Costs as Differential Costs

    • Direct fixed costs are frequently differential costs as these change when a product line is removed or added.

    Allocated Fixed Costs as Non-Differential Costs

    • Allocated fixed costs are usually not differential costs since they aren't directly impacted by a product line change.

    Opportunity Cost

    • Opportunity cost is a potential benefit lost when choosing one option over another.
    • Opportunity costs act as differential costs because they represent the net cash loss from alternative options.

    Customer and Product Line Decisions

    • Differential analysis approaches customer and product line decisions similarly. The critical comparison is the same: net benefits.

    Special Order Decisions

    Assumptions for special orders:

    • Capacity constraints will not limit acceptance of the special order.
    • Special order won't negatively impact regular sales.

    Cost-Plus Pricing

    • Cost-plus pricing is a pricing method where a markup is added to the cost of production.

    Target Costing Steps

    • Target costing has four steps.

    Theory of Constraints Steps

    • The theory of constraints uses five steps to manage constraints.

    Qualitative Advantage of Keeping Unprofitable Customers

    • Qualitative advantages of keeping unprofitable customers include maintaining customer relationships and potential future profitability.

    Joint Products and Joint Costs

    • Joint products are two or more products produced from a shared process. Joint costs are those incurred during the shared process.

    Joint Cost Allocation Methods

    • Two methods exist for allocating joint costs: the physical units method, and the sales value at split-off method.

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    Description

    Test your understanding of differential analysis concepts, including make-or-buy decisions, differential revenues and costs, and their applications in business decision-making. This chapter’s end-of-chapter questions are designed for self-assessment and reinforce your learning.

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