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Midterm #1 Study Guide

by: Elizabeth Notetaker

Midterm #1 Study Guide ACTG 213

Marketplace > University of Oregon > Accounting > ACTG 213 > Midterm 1 Study Guide
Elizabeth Notetaker
GPA 3.5
Accounting 213
Joe Sneed

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An extensive outline of chapters 5,10 and 11 for our first Midterm. Hope it helps!
Accounting 213
Joe Sneed
Study Guide
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This 3 page Study Guide was uploaded by Elizabeth Notetaker on Sunday April 19, 2015. The Study Guide belongs to ACTG 213 at University of Oregon taught by Joe Sneed in Spring2015. Since its upload, it has received 359 views. For similar materials see Accounting 213 in Accounting at University of Oregon.


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Date Created: 04/19/15
Accounting 213 Midterm 1 Study Guide Chapter 5 CostVolumeProfit Relationships CVP CVP Helps managers understand the interrelationships among cost volume and profit Analysis focuses on how profits are affected by the following 5 factors 1 Selling prices 2 Sales volume 3 Unit variable costs 4 Total fixed costs 5 Mix of products sold It is a vital tool in business decisions including what products and services to offer prices to charge marketing strategy and cost structure The first step in CVP analysis is to make a contribution income statement that displays sales variable expenses and contribution margin on a per unit basis and in total Contribution Margin Sales RevenueVariable Expenses First used to cover fixed expenses then whatever remains goes towards profits Contribution Margin as a percentage of sales is referred to as the CM Ratio It shows how the contribution margin will be affected by a change in total sales Ex CM Ratio 40 that means for each dollar increase in sales total contribution margin will increase by 40 cents CM Ratio Total Contribution MarginTotal Sales or per unit BreakEven Point level of sales at which profit is zero Neither profit nor loss fixed expenses are covered If sales equal zero the company s loss would equal its fixed expenses BE Number of Units Fixed Expenses CM BE Dollar Sales Fixed Expenses CM Ratio Once breakeven point has been reached net operating income will increase by the amount of the unit contribution margin for each additional unit sold Profit Unit CM x Q Fixed Expenses The relationships among revenue cost profit and volume are illustrated on a costvolumeprofit CVP graph Incremental Analysis they consider only revenue cost and volume that will change if the new program is implemented Target Profit Analysis Estimate what sales volume is needed to achieve a specific target profit Unit Sales to attain the target profit Desired Profit Fixed Expenses Unit CM Dollar sales to attain the target profitDesired Profit Fixed Expenses CM Ratio Margin of SafetyThe excess of budgeted or actual sales dollars over the breakeven volume of sales dollars It is the amount by which sales can drop before losses are incurred The higher the margin of safety the lower the risk of not breaking even and incurring a loss Margin of Safety in Dollars Total budgeted or actual sales Breakeven sales Margin of Safety Margin of safety in dollars Total Budgeted or actual sales in dollars Cost Structure Refers to the relative proportion of fixed and variable costs in an organization Ex Higher fixed costs and lower variable costs or switched Operating Leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales It acts as a multiplier If operating leverage is high a small percentage increase in sales can produce a much larger percentage increase in net operating income Degree of Operating Leverage Contribution margin Net operating Income Change in net operating income Degree of operating leverage change in sales Sales Mixrefers to the relative proportions in which a company s products are sold The idea is to achieve the combination or mix that will yield the greatest profits Chapter 10 Differential Analysis Differential Analysis focusing on the costs and benefits that differ between the alternatives Relevant Costs Costs and benefits that differ between the alternatives Relevant Benefits Benefits that differ between alternatives Avoidable Costs Cost that can be eliminated by choosing one alternative over another Unavoidable Costs Irrelevant Sunk Cost Cost that has already been incurred and cannot be avoided regardless of what a manager decides to do Sunk costs are always the same no matter what alternatives are being considered therefore they are irrelevant and should be ignored when making decisions Future costs that do not differ between alternatives should also be ignored Make or Buy Decision A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier is called a make or buy decision Special Order A onetime order that is not considered part of the company s normal ongoing business A special order is profitable if the incremental revenue from the special order exceeds the incremental costs of the order Constraint When a limited resource of some type restricts the company s ability to satisfy demand Managers must decide which products or services make the best use of the constrained resource Fixed costs are usually unaffected by such choices Favor the products that provide the highest contribution margin per unit of the constrained resource Bottleneck The machine or process that is limiting overall output Managing Constraints When a manager increases the capacity of the bottleneck it is called relaxing or elevating the constraint The capacity of a bottleneck can be effectively increased in a number of ways 1 Working overtime on the bottleneck 2 Subcontracting some of the processing that would be done at the bottleneck 3 Investing in additional machines at the bottleneck 4 Shifting workers from processes that are not bottlenecks to the process that is the bottleneck 5 Focusing business process improvement efforts of the bottleneck 6 Reducing defective units Last 3 most attractive because they are free w savings loint Product Costs and the Contribution Approach oint ProductsTwo or more products that are produced from a common input are known as joint products Splitoff Point The point in the manufacturing process at which the joint products can be recognized as separate products oint Cost The costs incurred up to the splitoff point Ioint costs are irrelevant in decisions regarding what to do with a product from the splitoff point forward Sell or process further decisions So long as the incremental revenue from such processing exceeds the incremental processing cost incurred after the splitoff point Chapter 11 Capital Budgeting Decisions Capital Budgeting How managers plan significant investments in projects that have longterm implications such as the purchase of new equipment or the introduction of new products Typical Capital Budgeting Decisions any decision that involves an outlay now in order to obtain a future return is a capital budgeting decision Including 1 Cost reduction decisions 2 Expansion decisions 3 Equipment decisions 4 Lease or buy decisions 5 Equipment replacement decisions Two broad categories of capital Budgeting Decisions 1 Screening decisionswhether a proposed project is acceptablepasses a hurdle 2 Preference decisions relate to selecting from among several acceptable alternatives The Time Value of Money A dollar today is worth more than a dollar a year from now Involve discounting cash ows Net Present Value Method The present value of a project s cash in ows is compared to the present value of the project s cash out ows Net present value The difference between the present value of these cash ows Whenever the net present value is zero or greater the investment project is acceptable Cash Flows 0ut ows 1 Immediate cash out ow in the form of initial investment 2 Expand working capital Current assetscurrent liabilities 3 Periodic outlays for repairs and maintenance and additional operating costs In ows 1 Increase revenues or reduce costs 2 Selling equipment for its salvage value when a product ends 3 Working capital tied up in the project can be released for use elsewhere Two Assumptions 1 All cash ows other than the initial investment occur at the end of periods 2 All cash ows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate Cost of Capital the average rate of return the company must pay to its longterm creditors and its shareholders for the use of their funds Preference Decisions Project profitability index Net present value of the project Investment required Internal rate of Return rate of return promised by an investment over its useful life It is computed by finding the discount rate at which the net present value of the investment is zero It can be used either to screen projects or to rank them Any project whose internal rate of return is less than the cost of capital is rejected and in general the higher a project s rate of return the more desirable it is Payback period Investment required Annual net cash in ow Length of time that it takes for a project to recover its initial cost from the net cash in ows it generates A shorter payback period is not always the best investment Simple Rate of Return Annual Incremental net operating income Initial Investment Capital budgeting technique that does not involve discounting cash ows


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