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This 10 page Study Guide was uploaded by ec on Wednesday August 26, 2015. The Study Guide belongs to ACC 211 at University of Miami taught by Sicre in Summer 2015. Since its upload, it has received 121 views.
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ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Chapter 5 What is the de nition of Cost Behavior Cost Behavior is the reaction of costs to changes in levels of business activities What is the equation for Total Cost Total Cost Fixed Cost Variable Cost What are Fixed Costs Fixed Costs are cots that remain constant in total regardless of the level of activity Remains the same in total regardless of activity When activity increases xed cost per unit decreases What are Variable Costs Variable Costs are costs that change in total proportionately with changes in the level of activity Remains the same per unit regardless of activity x As activity increases total variable cost increases What are Mixed Costs Mixed cost is a cost that has a combination of xed cost and variable cost What is the Relevant Range Relevant Range is the range of activity within which cost behavior assumptions are valid Cost Behavior graphs how are the presented Fixed Cost is a horizontal line on 1 the graph as it does not vary KR Fixed Cost per unit decreases with activity Total Fixed Cost Fixed Cost per Unit I I NumbernfUnil stduoed Numberernil stduned Variable cost is a diagonal or upward sloping line as it varies with activity Total VariableCost 1Ll39arialzulle Cost per Unit Variable cost per unit stays I NumberofUrIiLI ertiubed V NumberofUnilEProducred k aCtiVity therEfore has a horizontal line inquot squot ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Mixed Comm Mixed cost is a upward sloping line that starts from lm the point of the amount of xed cost 4000 3500 3000 2500 2000 quotul39ariahle Zest 15m 8 What are the four methods to separate 1000 500 Fined Cast Mixed COStS 0 Engineering Method Scatter Graph HighLow Method and Regression Simlileetmlieemem 9 The Engineering Approach The Engineering Approach relies on engineers or other professionals who are familiar with the technical aspect of the activity and the associated cost to analyze the situation and determine which costs are xed and which are variable Company hires experts or engineers Based on their knowledge they will make assumptions about which expenses should be xed and which ones should be variable Employs timeandmotion studies and scienti c management 10 Scatter Graphing The Scatter Approach plots historical activity and cost data on a graph to see how a cost relates to various levels of activity First plot the information for each observation on a graph Plot each observation as a pair of values Place a line through the visual center The straight line represents the behavior of maintenance cost as it relates to the number of miles driven TOTAL COST FIXED COSTS VARIABLE COST TOTAL MIXED COSTS FIXED COST ELEMENT VARIABLE COST ELEMENT 11 The HighLow Method The highlow method uses historical data and mathematical computations to approximate the xed and variable components of mixed cost The highlow method focuses on the mathematical differences between the highest and lowest observations unless one or both of them is clearly too high or too low to be representative of the rest of the data Use historical data x Select only 2 data points x Select the period with the highest activity x Select the period with the lowest activity Step 1 Select period with highest and lowest activity Step 2 Solve for B Variable Cost per unit V Cost at high Cost at low B Activity at high Activity at low Step 3 Solve for A xed cost Y a bx Step 4 Total Cost Equation V Total Cost Fixed Cost Variable Cost 12 Regression Analysis I39llliaed Rental Casts 0 500 1000 1500 2000 2500 3000 3500 Mathil l Hams ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Regression analysis also called the leastsquared method or linear regression analysis is a mathematical approach to determine xed and variable cost with statistical accuracy This method is excessively complex but it is a more reliable estimation technique Regression analysis uses the information contained in all the observations in a data SEt Chapter 6 What is the Traditional Income Statement The Traditional Income statement is sometimes called the functional income statement it is an income statement prepared in the multiplestep or singlestep income statement format which conforms to GAAP and can be used for external nancial reporting Sales Revenue Less Cost of Goods Sold Both variable and xed product cost Gross Pro t Less Operating Selling and Admin Expenses Both variable and xed period cost Net Income OR Loss What is the Contribution Income Statement A contribution income statement is a special income statement format that companies prepare for use internally that categorizes cost by behavior xed and variable cost rather than by the cost s nature or function Sales Revenue Less Variable Expenses both product and period cost Contribution Margin Less Fixed Expenseboth product and period cost Net Income OR Loss What is Absorption Costing Absorption costing product cost includes all the costs to acquire products and get them ready to sell regardless of whether the cots are variable or xed for traditional income statements What is Variable Costing Variable costing only the cost to acquire or to get them ready to sell that vary with output is treated as product cost for contribution income statements What is Contribution Margin The contribution margin is the amount remaining after all variable costs have been deducted from sales revenue It tells managers how much of their company s original sales dollars remain after deducting variable costs The contribution margin is the amount available to contribute to covering xed costs and pro t xed costs are listed and subtracted from the contribution margin to arrive at operating income What is Contribution Margin per Unit Selling Price per unit Variable Cost per unit Contribution Margin per Unit This tells us how much each unit contributes towards xed expenses and pro ts What is Contribution Margin Ratio ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS The Contribution Margin Ratio is when the contribution margin is expressed as a percentage of sales Contribution Margin per Unit Contribution Margin Ratio Selling Price per Unit V Total Contribution Margi Contribution Margin Ratio Total Sales 8 CostVolume Pro t Costvolumepro t CVP analysis is the analysis of the relationships between cost and volume the level of sales and the effect of those relationships on pro t 9 BreakEven Analysis Breakeven occurs when a company generates neither a pro t nor a loss The sales volume required to achieve breakeven is called the breakeven point The breakeven point tells managers how far sales can decline before the company will incur a loss 10 Break Even in Units Break Even in Units quantity tells us how many units we need to sell to make a pro t of zero Fixed Cost Break Even in Units Contribution Margin per Unit Sales Variable Costs Fixed Costs Pro t Selling price X of units Variable cost per unit X of units xed cost Pro t 11 Break Even in Sales Break Even in Sales tells use what our sales revenue has to be to make a pro t of zero V Fixed Cost Break Even in Units Contribution Margin Ratio Sales Variable Costs Fixed Costs Pro t Selling price X of units Variable cost per unit X of units xed cost Pro t 12 How many units do I sell CVP Formula 2 Determines how many sales units are required to break even Fixed Cost Target Pro t Contribution Margin per Unit 13 What does Sales Revenue have to be CVP Formula 1 Determines how much sales in dollars is required to break even V Fixed Cost Target Pro t Contribution Margin Ratio 14 What does Sales Revenue have to be to earn a target pro t CVP Formula 3 Determines the sales dollars required to earn a target pro t which is a percentage of sales V Total Fixed Cost Target Pro t Contribution Margin Target Pro t Percentage 15 Sensitivity Analysis Sensitivity analysis is a technique used to determine the effect on CVP when changes are made in the selling price cost structure variable andor xed and volume used in the calculations ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Sensitivity analysis is also called what if analysis 16 Changing Selling Price If the selling price changes but variable cost does not sales required to attain a target pro t can be determined using CVP 1 and a recalculate contribution margin ratio based on the new selling price V Reduce selling price V New Contribution Margin New selling price variable cost V New Breakeven xed cost new contribution margin All else equals if selling price decreases breakeven ooint increases and if selling price increase breakeven point decreases 17 Changing Variable Cost To analyze how a change in variable cost will affect the variable cost per unit we must look at the three components of per unit variable cost the cost of each item the variable selling expenses and the variable administrative expenses V Reduce variable cost V New Contribution Margin Selling price New variable cost V New Breakeven xed cost new contribution margin All else equals if variable orice decreases breakeven ooint decreases and if variable price increase breakeven ooint increases 18 Changing Fixed Costs Change in xed cost is very similar to variable cost use CVP 1 amp CVP2 V Increase Fixed cost V New Contribution Margin Selling price New xed cost V New Breakeven New xed cost new contribution margin All else equals if xed costs increases breakeven point increases and if xed costs decreases breakeven point decreases Totall fixEd 0031 Target WOW Total xed cost Target pro t W CO39nt rlib Uth39n m a rgll39l ratio Contribution margin per unit Contribution margin e Target profit percentage y 39 To determine the required sales in To determine the requrred sales in to achieve a target pm lt expressed t0 acl39lieve a target profit as a percentage of sales To determine the required sales in to aonieve a target pro t 9 ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Chapter 7 What is Relevant Information Relevant information is information that is pertinent to a particular decision in that has a bearing on which decision alternative is preferable Useful information that makes a difference when deciding between alternatives What are Sunk Costs Sunk cost are unaffected bv current decisions so they are irrelevant and we should not consider them when evaluating current decision alternatives Sunk costs include both amounts paid in the past and past commitments to pav That is once there is a binding commitment to pay cash or otherwise transfer resources the cost associated with that commitment is a sunk cost What are Relevant Costs A relevant cost is a future cost that differs between alternatives and a relevant bene t is a future bene t that differs between alternatives and is pertinent to a particular business decision A relevant cost must be a future cost because current decisions can have no effect on past expenditures What are Irrelevant Costs Are costs that do not affect the decision making What questions have to be asked to determine if an item is relevant or not amp the answers Relevant costs and bene ts possess two important characteristics 1 The cost or bene t must be something that will happen in the future 2 The cost or bene t must differ between decision alternatives Costs and bene ts will be only relevant if BOTH questions are answered by yes If either questions is answered by no the cost or bene t is irrelevant What are qualitative factors Qualitative factors are factors that cannot be measured numerically they must be described in words What are quantitative factors Quantitative factors are those that can be represented by numbers Equipment Replacement Do we keep old equipment or replace and buy new V For OLD equipment cost is a sunk cost so it is irrelevant For the NEW equipment the cost is relevant as that is what you will spend to buy Life is only relevant when they have different lives Salvage ValueResidual Value is relevant Operating Cost is relevant and has to be times by life or remaining life The sale of the old equipment is relevant for new equipment Add and Compare Special Orders Manufacturing businesses must often consider whether to accept a special order order that is outside its normal scope of business activity a onetime offer by a customer to buy a product at a reduced price ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Look if capacity allows it and if you can accept the special order Look at cost of making existing units Calculate special order 0 Sales Revenue 0 Variable Cost 0 Fixed Cost if there is additional xed cost Offer Variable Cost Pro t per unit w Pro t per unit X of units Pro t for the special order 10 Outsourcing Make or Buy Decision Buying services products or components of products from outside vendors instead of producing them is called outsourcing Buying services products or components of products from outside vendors instead of producing them is called outsourcing Calculate Cost of Making 0 Direct Materials 0 Direct Labor 0 Fixed amp Variable Manufacturing Overhead Calculate Cost of Buying 0 Purchase Fixed Manufacturing Overhead if not changed Chapter 8 1 What are Capital Investments ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS Capital investments aso known as capital projects are investments in property plant and equipment 2 What is Capital Budgeting Capital Project The capital budget focuses on the longterm operations of the company to determine how an organization intends to invest its scarce resources in longlived productive assets Capital budgeting is the planning and decision process for making investments in capital projects s High Cost Quickly Sunk Cost Long Lives High Degree of Risk 3 What is the Cost of Capital Cost of capital is the cost of obtaining nancing from all available nancing sources the cost of obtaining cash it is also referred to as the cost of capital rate the required rate of return or the hurdle rate 4 What is Accounting Information for Information used to make decisions 5 The Mission Overall Company Goals Organizational Goals are the goals that the people from the organization want to accomplish they constitute the overall objectives the company so those goals should not be subject to shortterm economic pressures These goals de ne why the organization exists goals are the why of the business There are usually combinations of nancial and non nancial goals Non nancial goals do not mention money they refer to activities that may or may not result in pro ts The primary nancial goal is to earn pro t this means that the goal is to earn a return on investment for the business owner or owners 6 Core Values What the Company Stands For Core Values de ne our perception of what is most important in life and also de ne a sense of right and wrong ofjust or unjust Companies must have similar set of core values in order to succeed 7 Vision The Hope for the Future Company leadership must develop a vision of the company s future Vision is where the companv is going and how will it get there Company vision is not all about income and nancial results 8 Strategy The Business Plan of Attack A strategy includes low prices and high volume or high quality superior service and high prices Some companies have pro t based on fast inventory turnover while others have an earnings strategy based on higher margins and slower turnover It must also have a plan of attack or a strategy to create those earnings 9 The Strategic Plan The What The steps outlined in the strategic plan sometimes referred to as a longrange budget are the what of doing business A company s strategic plan tends to have obiectives that are guanti able and a time frame for attainment of the obiectives 10 The Capital Budget The How ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS The capital budget is the how of the planning process The capital budget is the budget that outlines how a rm intends to invest its scarce resources in longlived productive assets The capital budget lays out plans for acquiring and replacing longlived expensive assets such as land buildings machinery and equipment 11 The Operating Budget The Who The budget that pertains to routine company operations for one to ve years in the future is called the operating budget The operating budget establishes who is responsible for the daytoday operation of the organization so we refer to it as the who of the planning process 12 The Goals The Why Many companies use a mission statement a summary of the main goals of the organization to communicate the rm s goals to all employees 13 The Capital Budget The capital budget plans for the acquisition and replacement of longlived expensive items such as land buildings machinery and equipment These longlived items are called capital assets The capital budget focuses on the longterm operations of the company to determine how an organization intends to invest its scarce resources in longlived productive assets During the capital budgeting process companies determine whether they should purchase items how much they should spend and how much pro t the items promise to generate 14 The Operating Budget The daytoday activities and the daytoday decisions 15 The four methods of Capital Budgeting Net Present Value NVP Internal Rate of Return IRR Payback Period Accounting Rate of Return 16 Present and Future Values Future is when you know how much you will invest today but want to nd out how much you investment will be worth in a certain amount of vears Present is when you know or can estimate the amount of money that will come to use in the future but want to nd out how much we should Spend to get it 17 Net Present Value MVP The net present value NVP of a proposed capital project is the present value of cash in ows minus the present value of cash out ows associated with a capital project A company calculates the NPV of capital project by discounting the net cash ows for all years of the project using the company s weighted average cost of capital as the discount rate A positive NVP rate indicated that the expected return on a proposed project is higher than the company s cost of capital A negative NPV indicated that the expected return on a proposed project is lower than the company s cost of capital An NPV of zero shows that the expected return on a project is exactly equal to the company s cost of capital Calculate the Present Value of Cash Flow ACC 212 EXAM 2 STUDY GUIDE EMILIE CROONENBERGHS 0 PV of Annual Cost In ows l PV of Annuity continuous reoccurring payments 0 PV of Residual Value PV of 1 one time payments V Calculate Net Present Value 0 Present Value of Cash Flows Original Investment NPV 18 Internal Rate of Return IRR The internal rate of return IRR of a propose capital project is the calculated expected percentage return promised by a project This method also known as the real rate of return or the timeadjusted rate of return determines the discount rate that makes the present value of a project s cash in ows and the present value of a projects out ows exactly the same 39 Calculate the Factor 0 Cost of lnvestment Present Value Factor Net Annual Cash In ows Look up Factor in PV of Annuity Table 19 Payback Period The payback period is a capital budgeting technique that measures the length of time a capital project must generate positive net cash ows to equal or quotpaybackquot the original investment in the project When net cash in ows are equal from one year to the next we determine the payback period by dividing the required initial investment by the annual net cash in ows ignores the time value of money V Initial lnvestment Payback Period in Years Annual Net Cash In ow Each vear vou take awav the annual net cash in ow until vou are pavback to see how many years it will take 20 Accounting Rate of Return The accounting rate of return method uses accrual accountinq Operating income rather than net cash ow as the basis for evaluating alternative capital budgeting process The accounting rate of return is the rate of return for a capital project based on the anticipated increase in accounting operating income due to the project relative to the amount of capital investment required V Straight Line Depreciation o Assets Cost Estimated Residual Value Straight Line Depreciation Estimated Useful Life Accounting Rate of Return 0 Increase in Operating Income Accounting Rate of Return Required Investment
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