Accounting 301

Contribution margin

Total sales - VC

Variable expense

variable expenses/sales

Variable expense ratio

variable expense per unit/unit selling price

Contribution margin ratio

CM /sales

contribution margin equation per unit

selling price - variable expense/selling price

What should variable ration and contribution ratio add up to

1

profit equation involving cm

Unit CM * Q - fixed expenses

profit equation involving cm ratio

CM ratio * sales - fixed expenses

full profit equation

(P * Q - V * Q) - fixed expenses

Change in profit equation

CM ratio * change in sales - change in fixed expenses

Operating leverage definition

a measure of how sensitive net operating income is to a given percentage change in unit sales

what does it mean when operating leverage is high

a small increase in sales will produce a large increase in net operating income

degree of operating leverage

CM/NOI; isn’t constant and highest when profit = 0; how fast NOI is growing over sales

Percentage change in net operating income

degree of operating leverage * percent change in sales

break even analysis

level of sales where profit is zero essentially fixed costs are covered

units to break even analysis

fixed expense/unit CM

Dollars to break even

fixed expense/CM ratio

NOI formula

CM ratio * sales - fixed expenses

margin of safety

total budgeted(or actual) sales - break even sales

• how much sales can dec before a company incurs a loss

% margin of safety

margin of safety $/total budget sales in $

Target profit analysis

estimating the level of unit sales and dollar sales needed to achieve a target profit

Target profit analysis formula method

target profit + fixed expenses/CM ratio

Unit Sales equation when given target

target NOI + FC/CM per unit

$ Sales equation when given target

target NOI + FC/ CM ratio

Top down Approach

planning method where senior management sets high-level financial targets, such as budgets or revenue goals, and distributes them down to departments for implementation; based on human interaction

Bottom up approach

collaborative process where lower-level managers and departments create detailed expense and revenue estimates, which are then aggregated to build the company-wide budget; based on actual metrics

Materials Price Variance

AQ purchased x (AP - SP); Measures whether the actual price paid per unit of material differed from standard

Direct cost

can be traced easily and conveniently to a cost object

Indirect cost

cannot be traced easily and conveniently to a cost object

cost object

product, job, department, customer, or anything else you are measuring cost for

Nonmanufacturing costs

Selling costs and General and administrative costs

Manufacturing costs

Direct materials, direct labor, manufacturing overhead

product costs

things that go into inventory first and become expense later when the product is sold

Period costs

goods expensed in the period incurred

distortions that can affect decision making

1) high volume products are overcosted

2) easy to produce products are overcosted

Activity

an event that causes overhead resources to be consumed.

Activity Cost Pool

A bucket where costs related to one activity are accumulated

Activity Measure / Cost Driver

quantity used to assign activity cost to products

Activity rate formula

Estimated cost in pool / Estimated total activity

Overhead assigned to product

Activity rate x Product’s activity usage

Total product cost

Direct materials + Direct labor + Total assigned overhead

Overcosted product:

assigned too much overhead by the old system. It looks less profitable than it really is

Undercosted product

assigned too little overhead by the old system. It looks more profitable than it is

Materials Quantity Variance

SP x (AQ used - SQ allowed); Measures whether the actual quantity used differed from the standard quantity allowed

Unfavorable

actual cost > standard cost

Favorable

actual cost < standard cost for the comparison being made

Learning and Growth Perspective

Are we improving our ability to create value in the future?

•employee training hours, employee retention, employee skill certifications, information system capabilities, employee satisfaction

Internal Business Process Perspective

Are internal operations efficient and effective?

• defect rates, manufacturing cycle efficiency, average setup time, time to, launch new products, percent of on-time production

Customer Perspective

Do customers recognize greater value?

• customer satisfaction, retention rate, market share, referral rate, delivery time, repeat purchase rate

Financial Perspective

Has financial performance improved?

• ROI or ROA, residual income, sales growth, operating income, cash flow from operations

Environmental

percent of recycled materials used, energy consumption per unit, waste reduction

Social

employee safety incidents, community service hours, workforce retention

Governance

board independence, ethics violations, CEO pay ratio

Governmental Funds

These focus on short-term current financial resources. They use modified accrual accounting + economic resources focus

• General fund, Special revenue fund, Debt service fund, Capital projects fund, Permanent fund

Proprietary Funds

These are business-like funds. They use full accrual accounting.

Enterprise fund and internal service fund

Fiduciary Funds

These hold resources for others. They generally use full accrual accounting.

• Pension trust, Investment trust, Private-purpose trust, Custodial

General fund

day to day of running a city or state

• example; a city pays salaries of police officers and firefighters

Special revenue funds

money legally restricted for projects

• example; a gasoline tax fund

Debt service fund

savings account for paying off long term debt

example: paying back bonds used for a library

Capital projects funds

used to finance major capital facilities

• construction of bridge or courthouse

Permanent fund

restricts so that earnings and not principal are used to support government programs

example: cemetery perpetual care fund

proprietary funds

business like funds(profit)

enterprise fund, internal service fund

Enterprise fund

sell goods or service to the general public

example; trash pickup/electricity

internal service fund

sell goods or services to other governmental departments

example: centralized motor pool, copying center, airport, water, sewage

Fiduciary Funds

resources held and ,damaged by the government for the benefit of others

Pension(other employee benefit) trust funds

manage amounts for pensions and other employee benefit plans

example; pension fund

Investment trust funds

manage investments for external parties such as governments or non profit orgs

example; a state invests money on behalf of local governments to earn a higher return

private purpose funds

all other trust funds where the principal and interest are managed for the benefit of specific individuals, public orgs or other governments

example; dying without a heir

Custodial funds

manage amounts that are in the temporary custody of the government; not actively invested by government to earn a return

Proprietary, fiduciary, and government-wide statements

full accrual + economic resources focus

Deferred outflow

expense later

Deferred inflow

revenue later

Encumbrances

commitments to spend

when are budgetary amounts are usually recorded

at the beginning to record estimated inflows/outflows and at the end to reverse and close the budget

Nonspendable

cannot be spent

Restricted

externally restricted

Committed

formally committed by highest authority

Assigned

intended for a purpose, but not formally committed

Unassigned

residual spendable balance

Government-Wide Financial Statements

Statement of Net Position, statement of Activities

• excludes government wide statements

• Governmental fund information must be adjusted from modified accrual

Other Financing Sources

debt issuance proceeds, transfers in, sale of capital assets

Other financing uses

transfers out