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ACCT 226 Week 5 Notes

by: Rachel Whitbeck

ACCT 226 Week 5 Notes ACCT 226 - 002

Rachel Whitbeck
GPA 4.0

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These notes cover what we went over in class from Tuesday, February 16 through Thursday, February 18th. Includes cost volume profit, contribution margin, and CM ratio. I wrote down what was on the ...
Introduction to Managerial Accounting
Debbie Huguley Brumbaugh
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This 3 page Class Notes was uploaded by Rachel Whitbeck on Tuesday February 23, 2016. The Class Notes belongs to ACCT 226 - 002 at University of South Carolina taught by Debbie Huguley Brumbaugh in Spring 2016. Since its upload, it has received 27 views. For similar materials see Introduction to Managerial Accounting in Accounting at University of South Carolina.


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Date Created: 02/23/16
ACCT 226 TR 10:05 Tuesday, February 16, 2016  Cost Volume Profit (CVP) primary purpose o To estimate how profits are affected by  Sales price  Sales volume  Unit VC  Total VC  Mix of products o Focus on cost behavior o Relevant range: key assumptions of CVP analysis  Selling price is constant  Costs are linear and can be accurately divided into variable (constant per unit) and fixed (constant in total) elements  In multiproduct companies, the sales mix is constant o Why study this? Helps managers decided  What goods or services to offer?  What prices to change?  What cost structure should be set? o Basics of cost-volume-profit analysis  The contribution margin income statement (used internally) is helpful to managers for judging the impact on profits of changes in selling price, cost, or volume, with an emphasis on cost behavior  Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted  Used first to cover fixed expenses  Any remaining CM contributes to net operating income (profit $)  Sales, variable expenses, and CM can also be expressed on a per unit basis o Can help determine the break even number (Where profit is exactly $0) o To estimate profits, just multiply the number of units sold above the break even mark by the CM per unit  CVP equation  Profit = (sales – variable expenses) – Fixed expenses o Sales = quantity sold x selling price per unit o Variable expenses = variable expenses per unit x units sold  Profit = (PQ – VQ) – Fixed expenses  Preparing the CVP graph  Choose some sales volume and plot the point representing total expenses (fixed and variable)  Breakeven point is the intersection of sales and total expenses  The area between sales and total expenses (to the right of the breakeven point, that little triangle shape) represents profit o Contribution Margin Ratio- calculated by dividing the total contribution margin by total sales.  Remember CM is total sales minus variable expenses  To find the change in net operating income from an increase in total sales, you multiple the increase in total sales by the CM ratio Thursday, February 18, 2016  We can use CM ratio to predict the impact on profit (could go up or down)  In the bike example in class, if we sell 100 more bikes and generate $50,000 more in sales, our net operating income actually goes down! o Just remember that increasing sales doesn’t necessarily equate to increasing income  Quick check: selling price is $1.49, variable expense per cup of coffee is $0.36, fixed monthly expenses is $1,300, 2,100 cups are sold per month. What’s the CM ratio? o We know that CM = total sales – variable expenses o Total sales= 2,100 x $1.49 = $3,129 o Variable expenses = $0.36 x 2,100 = o Wait a second, there’s an easier way: CM ratio= unit contribution margin/unit sales ! o So now we can use the unit CM (which is the sales price per unit – variable cost per unit) to find the CM ratio  Unit CM= $1.49 – 0.36 = $1.13  Unit CM/unit sales = $1.13/1.36 = CM ratio!  Adding variable costs reduces contribution margin  Just make sure you know all the formulas and you’ll be able to answer pretty much any question


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