Managerial Accounting for Managers

Managerial Accounting for Managers
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1(a) Managers often assume a strictly linear relationship between cost and the level of activity. Under what conditions would this be a valid or invalid assumption?
Managers make the assumption that there is a direct relationship between cost and the level of activity. This assumption is valid in situations where the kind of cost being considered is the variable cost (Weygandt et al., 2020). The variable costs are directly proportional to the levels of production. Therefore, the higher the production/ level of activity, the higher the variable costs. There are also situations where the above assumption may be invalid. For instance, the assumption may be invalid when the fixed costs are put into consideration. Fixed costs remain fairly constant despite the level of activity. The assumption may also be invalid when considering semi-fixed costs since these remain fairly constant despite the level of activity.
b. Only variable costs can be differential costs. Do you agree? Explain.
I do not agree with the statement that only variable costs can be differential costs. Differential costs are defined as the cost difference between two or more major business decisions. These costs help managers to decide the best viable option when a decision must be made between different options. There are some factors that are used to determine the best option. These include projected revenue, profit, loss among other factors. Differential costs can be categorized into several different types. These include variable costs, fixed costs, or even a combination of these two types. Consequently, it is not true to say that only variable costs can be differential costs. Rather, variable costs can be a type of differential cost.
2. Explain how a shift in the sales mix could result in both a higher break-even point and a lower net operating income.
In a situation where there is a significant shift in the sales mix, both a higher break-even point and lower net operating income could result. Following is an explanation of this could occur. When the sales mix shift so that it results in low contribution margin from high contribution margin products, the average contribution ratio for the company/ firm could potentially decline. Due to the decline, the total contribution margin for the average amount of sales in the business could also decline. Consequently, there would be a significant decline in the net operating income of the company/ business. Further, the break-even point would be elevated since it becomes a necessity to increase the number of sales to achieve the same amount of fixed costs. The above situation becomes a necessity because of the lower contribution margin ratio. The break-even point is generally considered to be the point where the total revenue generated equals the total costs incurred in the process of production. In such a situation, the business makes no profit or loss. The contribution margin ratio, on the other hand, is the difference between the sales made by a business and the variable costs. The ratio is then expressed as a percentage.
3. a. Why do companies use predetermined overhead rat...