Discussion Questions Related to Contribution Margin
Contribution Margin Main
| Contribution
Margin MC Questions | Graduate
MA Course
1. What is the main difference between variable (or direct)
costing and full absorption costing?
(See Chapter 2,
Exhibit 2-3, the example from
Chapter 8, and the Hepworth summary).
2. Which inventory valuation methods do not provide proper
matching according to GAAP?
(See the
CM controversy summary, Exhibit
2-1 and Exhibit 2-3).
3. Which inventory valuation method, or methods, includes an
underlying assumption that
production volume is the only major cost driver? (See
the Cost
Volume Profit Models and
the
CM controversy summary).
4. Which audience was full absorption costing mainly designed to serve? (See Exhibit 2-4).
5. Which audience was direct or variable costing designed to serve? Why? (See Exhibit 2-4).
6. What type of analysis must be performed before variable (or
direct) costing statements
can be prepared? (See Chapter 2
and Exhibit 1-3).
7. What is contribution margin? (See Chapter 2, Chapter 8 and Figure 11-17).
8. Is gross profit comparable to contribution margin? Explain. (See Chapter 2).
9. Generally, when will net income under full absorption
costing be different from net income
under variable costing? Why? (See Chapter
2).
10. Which of the two traditional inventory valuation methods
would you expect to provide the
largest amount of net income when the number of
units produced are greater than the number
of units sold? Why? (See Chapter
2 and Chapter 8).
11. Which net income amount is more meaningful, throughput
costing net income, direct costing
net income or absorption costing net income?
Include your definition of meaningful?
(See Chapter 8).
12. Do you see a potential behavioral problem with absorption
costing? Explain.
(See Chapter 8 and the
CM controversy summary or Chapter
11).
13. Would the use of variable costing correct the problem in
the previous question? Explain.
(See Chapter 8
and the CM controversy summary or Chapter
11).
14. Do you see any potential behavioral problems associated
with variable costing? Explain.
(See the CVP Model Figure
11-15, Exhibit 8-6 graphs, the CM controversy summary or
Chapter
11).
15. Would the use of absorption costing correct the problem in
the previous question? Explain.
(See the CM controversy summary
or Chapter
11).
16. Would the use of throughput costing solve the behavioral
problems associated with
absorption costing and variable costing? Explain.
(See Chapter 8).
17. The advocates of variable costing say that variable
costing is more consistent with economic
reality. What do you think they mean by
this? (See the CM controversy summary).
18. Why are the generalizations about the relationship between
absorption costing and variable
(or direct) costing called generalizations? (See Chapter
2).
19. What are the assumptions underlying the conventional
linear cost volume profit analysis?
(See Chapter 11).
20. What does a constant sales price mean? Is this realistic?
(See Chapter 11,
Figure 11-1 and Figure 11-2).
21. What does constant variable cost per unit mean? (See
Chapter 11 and Figures 11-5,
11-6,
11-13
and 11-15).
22. What assumption causes the total variable cost function to
be linear?
(See Chapter 11, Figure 11-5
and Figure
11-6).
23. What are some of the arguments against the conventional
linear CVP analysis?
(See the CM controversy
and the Kaplan & Shank and Hepworth
summaries). (Other
arguments can be developed from the ABC articles
and the environmental cost articles.
For example, see the summaries of Hammer
& Stinson, Kite and Lawrence
& Cerf).
24. Develop an equation for direct or variable costing net
income using the following symbols
and data from Bob’s Boats: (See Bob's
Boats solution).
|
NIA = Absorption costing net income before taxes |
25. Calculate direct costing net income based on your equation
and the data given above.
(See Bob's Boats
solution).
26. Develop an equation for absorption costing net income
using the symbols above assuming
the fixed overhead per unit is constant from
period to period. Note: The easiest way to do
this is to start with the equation
for direct costing and make the appropriate adjustment.
(See Bob's Boats solution).
27. Calculate absorption costing net income based on your
equation and the data given above.
(See Bob's Boats
solution).
28. Develop an equation for throughput costing net income
using the symbols above.
Note: The easiest way to do this is to start with the
equation for direct costing and make the
appropriate adjustment. (See Bob's
Boats solution).
29. Calculate throughput costing net income based on your
equation and the data given above.
(See Bob's Boats
solution).
30. Compare and discuss the differences between your answers to the previous three questions.
| Now, assume Bob’s
Boats produced zero
units the following year, i.e., Xp=0, but sold 5,500 units, i.e., Xs = 5,500. |
31. Calculate direct costing net income. (See Bob's Boats solution).
32. Does direct costing have a unique break-even point? Why?
If so what is the break-even point?
(See Bob's Boats solution).
33. Using the data for year two above (i.e., Xp = 0 and Xs = 5,500) calculate absorption costing net income. The fixed overhead rate per unit is still $60, i.e., based on a denominator activity level of 12,000 units. (See Bob's Boats solution).
34. Does absorption costing have a unique break-even point? Why? If so what is the break-even point? (See Bob's Boats solution).
35. Using the data for year two above (i.e., Xp = 0 and Xs = 5,500) calculate throughput costing net income. (See Bob's Boats solution).
36. Does throughput costing have a unique break-even point? Why? If so what is the break-even point? (See Bob's Boats solution).
37. Which method of costing is the closest to the cash flow method?
38. What are the arguments against the contribution margin
approach from the GAAP
perspective? (See the CM controversy
summary).
39. What are the arguments against the contribution margin
approach from the ABC perspective?
(See the CM controversy
and Kaplan & Shank summaries).
40. What are the arguments against the contribution margin
approach from the continuous
improvement Lean Enterprise perspective? (See the CM controversy
summary).
41. What are the arguments for the contribution margin
approach provided by Boer and
Horngren? (See the CM controversy
and Boer and
Horngren summaries).
42. What is an argument in defense of CM related to management
information and decisions?
(See the CM controversy
summary).
43. What is an argument in defense of CM related to management
signals and resulting behavior?
(See the CM controversy
summary).
44. Can the CM concept be defended against the claim that it
is inconsistent with the continuous
improvement concept? (See the CM controversy
summary).
45. Luther and O'Donovan defend the CM approach and discuss a
method they refer to as
"cost-constraint-profit analysis". How does
this differ from the usual cost-volume-profit
analysis? (See the Luther
& O'Donovan summary).
46. What was Kaplan’s suggestion concerning a possible
reconciliation of the CM approach
with ABC? (See the Kaplan
and Shank, Chapter 11
and the Ali and Kee
2001 summaries).
47. Atwater and Gagne provide an argument against the
contribution margin approach from the
TOC perspective related to product mix decisions.
Explain their view.
(See the Atwater
& Gagne summary and the TOC
problems).
48. Primrose argues that there is really nothing wrong with
traditional cost management.
What is the main basis for Primrose's arguments? (See
the Primrose summary).
49. What is the relationship between the
contribution margin ratio (CMR) and the return on sales
ratio (ROS)? (See Chapter
14).
50. In the Cal Company problem illustrated in MAAW's Chapter
11, P =10, V = 6,
TFC = 120,000 and the tax rate is 40%. (See Chapter
11 for more specifics).
Assume total assets = $500,000 and determine the Return
on Sales (ROS) and Return on
Investment (ROI) ratios after taxes when X = 80,000?
(See Chapter 14).
