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ACC 211 Test 2 Notes

by: Jake Fuemmeler

ACC 211 Test 2 Notes 20450

Marketplace > Missouri State University > Accounting > 20450 > ACC 211 Test 2 Notes
Jake Fuemmeler
GPA 3.8

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About this Document

These notes cover chapters 6 - 9 in "Managerial Accounting" 4th edition by Bruan, as taught by George Schmelze.
Introduction to Managerial Accounting
George Schmelzle
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This 1 page Bundle was uploaded by Jake Fuemmeler on Friday March 18, 2016. The Bundle belongs to 20450 at Missouri State University taught by George Schmelzle in Spring 2016. Since its upload, it has received 60 views. For similar materials see Introduction to Managerial Accounting in Accounting at Missouri State University.


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Date Created: 03/18/16
Chapter 6 I. Key Characteristics of Various Cost Behaviors Cost behavior: How cost changes as volume changes Common behaviors Variable Fixed Mixed A combination of various and fixed Example: Supervisor salary Key characteristics - Variable Change in direct proportion with volume changes Variable cost per unit remains constant Cost graphs Vertical axis shows total cost Horizontal axis shows volume activity Has slope Key characteristics - Fixed Stays constant over a wide range of volume Fixed costs per unit of activity vary inversely with changes in volume Cost and decisions Committed fixed costs Examples: Rent, depreciation Discretionary fixed costs A fixed cost that can change with management choices Examples: Employee training, machinery fixes/maintenance, marketing Cost graphs Always flat lines with no slope that intersect the y axis at a level equal to total fixed cost Often a company is not at full capacity and can make the smallest fixed cost per unit a dangerous cost per unit Key characteristics - Mixed Total mixed cost changes in proportion with volume, variable cost piece Mixed cost per unit changes inversely with volume, fixed cost piece Cost graphs Slope upward but do not begin at the origin, intersect y-axis at level of fixed costs II. Cost Equations Variable cost equation Total variable cost (y) = Variable cost per unit (v) x Volume of activity (x) Cost of unit x number of units y=vx Fixed cost equation Total fixed costs (y) = Fixed costs of a time period (f) y=f Mixed cost equation Total mixed cost (y) = Variable cost component (vx) + Fixed cost component (f) y=vx+f Cost prediction Relevant range Band of volume where total fixed costs remain constant at a certain level Variable costs per unit remain constant at a certain level Step costs Supervisor costs With increase of volume, mixed costs jump levels Curvilinear cost Assumption of a linear slope when in reality it changes throughout with peaks and crests Sustainability and Cost Behavior Changes in cost behavior with sustainability Example: Changing to online billing lowers paper, variable costs III. Using Account Analysis Four methods of analysis Account analysis Use judgement to base if a cost is fixed, variable, and/or; Subjective Scatter plots Use historical cost, cost data on y-axis, volume on x-axis Visualize costs relationship with volume High-low method Steps Find variable cost per unit (slope) ∆Cost (Y)/ ∆Volume (X) Using high and low values Find the fixed costs (y intercept) Fixed costs= Mixed - Variable Create cost equation Regression Analysis R-Squared Value Goodness of fit; Ranges from 0 to 1 Y-Intercept: Fixed Cost X Variable: Variable Cost Data concerns Only relevant within range Seasonal variations Inflation Outliers IV. Using Variable Cost and making Income Statement Absorption costing Required by GAAP for external reporting Assigning manufacturing costs to all products DM, DL, Variable MOH, Fixed MOH Manager Incentives Inventories increase, absorption costing income is higher than variable costing income Inventories decrease, absorption costing income is lower than variable costing income Managers can increase production to build up inventory to maximize income Variable Costing Assigns only variable manufacturing costs to products Fixed MOH=Period Cost For internal mgmt decisions Contribution margin income statement Splits expenses from variable and fixed Finding contribution margin Revenue (Cost per unit x volume) - Variable COSG (Cost per unit x volume) - Variable op. expenses (Cost per unit x volume) = CONTRIBUTION MARGIN (Also found with Cost per unit for sale - Cost per unit of V. cost) - Fixed MOH Reconciling Operation income with two costing systems Difference = (∆ Inventory) x Fixed MOH per unit Key points Contribution Margin Income Statement Absorption costing income means zero inventory Zero inventories means we have same income Contribution margin is organized revenue less variable cost= contribution margin less fixed cots Show same operation income if inventory levels are stable Chapter 7 I. What is CVP Analysis? Cost-Volume-Profit analysis: Is concerned with the effects on net operating income Selling prices Sales volume Unit variable cost Total fixed costs Mix of products sold II. Review of Contribution income statement Contribution Margin: Amount that sales (net of variable expenses) contributes toward covering fixed expenses and then toward profits If CM=Fixed Expenses Break even If CM>Fixed Expenses Profit If CM<Fixed Expenses Loss Unit contribution margin remains constant so long as the selling price and the unit variable cost do not change III. Effects of changes in sales volume on net op. income Changes in sales volume take into effect of CM CM has an amount per unit, this total amount counteracts break even and losses Break-even point Point where total sales revenue equals total sales expenses Point where total contribution margin equals fixed expenses IV. CVP Relationships Equations and profit graphs Profit Profit= (Sales-Variable expenses) - Fixed Expenses With a single product it can be more specified Profit=(PxQ - VxQ) - Fixed Expense P: Selling price per unit Q: Quantity V: Variable price per unit Using CM Profit=Unit CM x Q - Fixed expense Contribution Margin Ratio CM Ratio=CM/Total sales With only one product can go further CM Ratio=Unit CM/Unit Selling price ALWAYS constant with a product (unless variable costs per unit or selling price change) Uses of CM Ratio Finding profit Profit=CM ratio x Sales - Fixed Expenses Finding increase of contribution margin Increase of Income=∆Sales x CM Ratio By Units: ∆Sale Units x CM per unit V. Target profit & Break-even analysis Target Profit Equation Method Profit=Unit CM x Q - Fixed Expenses Formula Method Unit Sales to attain target profit: Unit Sales =Target profit + Fixed expenses/Unit CM Dollar sales Dollar Sales = Target profit + Fixed expense/CM Ratio Example: $70,000 + 80,000/.40 = $375,000 Break even Dollar sales Break even = Fixed expense/CM ratio Example: $80,000/.40=$200,000 Sales Units Unit Sales = Fixed costs/CM per unit $80,000/200= 400 units VI. Margin of safety Definition: Excess of budgeted (or actual) sales over the break-even sales. The margin of safety can be expressed as break-even sales less sales Margin of Safety = Sales - Break even sales Percentage Margin of Safety Margin of Safety = Margin of Safety/ Sales Companies with high fixed costs often have higher fixed costs, higher break even costs, and lower margin of safety VII. Operating Leverage Measures how a given percentage change in sales affects the net operating income Degree of Operating Leverage = Contribution Margin/ Net (operating) income Often higher with higher fixed costs To discover difference of sales and income Degree of Operating Leverage x percent increase/decrease of sales Is not constant; changes with level of sales IX. Multi-product break-even analysis Composite Contribution Margin Ratio Combining the Contribution Margin of both products into a total, or composite Overall CM ratio= Total CM/Total Sales Dollars Break-even dollar sales = Fixed Expenses/Overall CM Ratio Chapter 8 I. Identification of Relevant Costs Relevant Cost or Benefit: Cost or benefit that differs, in total, between the alternatives Any cost or benefit that does not differ between the alternatives is irrelevant and can be ignored Relevant costs and benefits are known as differential costs or benefits A relevant cost is something that drops to 0 when you stop producing a product Contribution margin and any relevant income is classified as the benefit Avoidable costs that are relevant are classified as the cost Avoidable costs: Costs that can be eliminated in whole or in part by choosing one alternative over another; Are relevant Things that are never relevant Sunk costs: Things that have already incurred and been paid for Depreciation is sunk 99.9% of time Future costs that do not differ between alternatives To make a decision: Eliminate costs and benefits that do not differ, in total, between alternatives Base the decision on the remaining costs and benefits Direct Labor, Direct Materials, and Variable MOH are always relevant II. Drop or Retain a Segment If by dropping a product a company is able to avoid more fixed costs than it loses in CM it is better if product with eliminated Only includes relevant costs Can be found by comparative income statements III. Make or Buy Decision A decision concerning whether an item should be produced internally or purchased from an outside supplier is called a “make or buy” decision Often a discussion with poor supplier relationships or poor quality control Only looking at relevant cost Direct material, Direct Labor, Variable MOH are always relevant If selling price is higher than relevant cost of production, making is cheaper IV. Utilization of Constrained Resources Anything that prevents an organization from getting more of what it wants; a constraint Examples Machinery not having capacity to satisfy demand Supplies of critical parts not sufficient If the machinery or work center is the constraint Creates bottleneck effect When capacity is not sufficient to satisfy demand something must be cut back, how to determine which product to cut back? Fixed costs are unusually not affected in decision; just a question of how to use fixed costs and assets Maximizes total contribution margin therefore total profits Maximized by product with highest contribution margin with using most of constrain (such as time) Managing Constraints Processing units with bottleneck constraint that people actually want to buy Produce only what can be sold Possibilities on improvement Temporary Pay DL overtime to continue processing over normal hours Shift workers from non-bottleneck to bottleneck product Long-term Increase DL or machinery towards bottleneck Reduce defects V. Special Order A one time order that does not affect a company’s operations Only incremental costs and benefits are relevant Fixed factory overhead, which is irrelevant, is not included If the relevant costs exceed with buyer’s offered price: Do not do special order Make or Buy, Discontinue, Special Order, Constraints Chapter 9 I. Overview of Budgets Used for planning purposes and often divided by department Helps develop goals and projections Types of Budgets within Master Budget Sales Simple price x expected units sold Production Based on sales + ending inventory - beginning inventory = Desired production End/Beg inventory often based off percentage for future months In units Direct Materials Take desired # of units produced x pound/materials per unit + end inv - beg inv Direct Labor Take production units x direct labor hours per unit x hourly rate On test: Connect with MOH budget Manufacturing Overhead Take labor hours per unit (if that is the allocation base) x overhead rate + fixed overhead (less depreciation if finding cash flow) On test: Connect with DL budget Labor hours will be used on test End Finished Goods Selling and Administrative / Operating Expense Unit sales x expense per unit + fixed expense Less depreciation if finding cash flow Cash Budget Budgeted Income Statement Budgeted Balance Statement Purposes of Communicate management's plans Forces planning to be top priority Provide a means of allocating resources effectively Uncovers potential bottlenecks Coordinates the activities Provides goals that serve as benchmarks for evaluating performance II. Budgeting Production Budgets Often just in units Ending/Beginning inventories of a quarter are the ending/beginning values of the last and first month respectively


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