Managerial Accounting EXAM 2 - Kelley Walker

Cost-volume-profit (CVP) analysis helps managers ....

make many important decisions such as what products and services to offer, what prices to charge, etc

Contibution Margin

the amount remaining from sales revenue after variable expenses have been deducted

break-even point

The level of sales at which profit is zero

to estimate the profit of at any sales volume above the break-even point you ...

multiply the number of units sold in excess of the break-even point by the unit contribution margin

the contribution format income statement

Profit (net operating income) = (Sales - Variable Expenses) - Fixed Expenses

Cost-volume-profit (CVP) graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand

when sales are above the break even point ..

the company earns a profit and a size of the profit

the break even point on the profit graph is ...

the volume of sales at which profit is zero and is indicated by a dashed line

Contribution margin ratio (CM ratio) formula:

contribution margin / sales

variable expense ratio formula ..

variable expenses / sales

the contribution margin ratio shows how ...

the contribution margin will be affected by the changes in sales volume

the impact on net operating income of a change in sales volume can be computed by multiplying the CM ratio by the corresponding change in dollar sales

change in contribution margin = CM Ratio x change in sales

the relation with profit and CM ratio is expressed by ...

profit = CM Ratio x sales - fixed expenses

Incremental analysis

process used to identify the financial data that change under alternative courses of action

managers use break-even and target profit analysis to answer such questions like ...

how much would we have to sell to avoid incurring a loss or how much would we have to sell make a $xx,xxx profit ?

formula for break even point (in unit sales or dollars) ...

unit sales to break even = fixed expenses / Unit CM

Target profit analysis

estimating what sales volume is needed to achieve a specific target profit

we can compute the unit sales required to attain a specific target profit using this formula :

unit sales to attain the target profit = target profit + fixed expenses / Unit CM

Margin of safety

the amount by which the sales level exceeds the break-even level of sales

the margin of safety in dollars can be expressed by this formula :

margin of safety in dollars = total budgeted (or actual) sales - break-even sales

cost structure refers to ..

the relative proportion of fixed and variable cost in an organization

Operating leverage

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

- acts as a multiplier

Degree of operating leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits

degrees of operating leverage formula:

degrees of operating leverage = contribution margin / net operating income

percentage of change in net operating income :

percentage of change in net operating income :

degree of operating leverage x percentage change in sales

the degrees of operating leverage allows a ...

quick estimation of what the impact a given percentage change in unit sales would have on a company's net operating income

sales mix

the combination of products that make up total sales

variable and absorption costing are ...

alternative methods of determining unit product costs

Variable Costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.

fixed manufacturing costs

Fixed factory overhead—Fixed manufacturing costs (e.g., depreciation on factory buildings and equipment, manufacturing *supervisory* salaries and wages, property taxes and insurance on the factory, etc.)

selling and administrative costs are ...

period costs and are expressed as "incurred" on an income statement

because absorption costing treats fixed manufacturing overhead as a product costs .....

a portion of fixed manufacturing overhead is assigned to each unit as it is produced

the shifting of fixed manufacturing overhead cost between periods can ...

cause erratic fluctuations in net operating income and can result in confusion and unwise decisions

Under absorption costing

it's possible to defer a portion of the fixed manufacturing overhead cost from one period to a future period through the inventory account

Segmented Income Statement

provides revenue and cost data for each segment of the company in a comparative fashion (side by side)

Activity-based costing (ABC)

a technique to assign product costs based on links between activities that drive costs and the production of specific products

The ABC system that traces direct nonmanufacturing costs to products includes:

commissions paid to sales- people, shipping cost and warranty repairs

The ABC system allocates indirect nonmanufacturing costs to products ...

wherever the products have presumably caused the costs to be incurred

The ABC product cost calculations include ...

all direct costs that can be traced to products and all indirect costs that are caused by products

Activity Based Costing (ABC) purposely ...

do not assign two types of manufacturing overhead costs to products - which are

1. organization-sustaining costs

2. unused capacity costs

organization sustaining costs include

the factory's guard's wages, the plant controllers salary, and the cost of supplies used by the plant manager's secretary

- they are assigned to to products in traditional absorption costing system

Activity

An event that causes the consumption of overhead resources in an organization

Activity cost pool

A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system

Activity measure

a measure of the amount of activity that drives the costs in an activity cost pool

the two most common types of activity measures are :

1. transaction drivers

2. duration drivers

Transaction driver

number of times an activity occurs

ex: number of bills sent to a customers

Duration driver

a measure of the amount of time required to perform an activity

Unit-level activities

activities that are performed each time a unit is produced

ex: providing power to run equipment

Batch-level activities

Activities performed for each batch of products rather than for each unit

ex: placing purchase orders, setting up equipment, arranging shipments

Product-level activities

Activities that relate to specific products that must be carried out regardless of how many units are produced and sold

ex: designing a product, advertising a product, and maintaining a product manager and staff

Customer-level activities

activities that are carried out related to customers

ex: customer service, catalog mailing, etc

Organization-sustaining activities

activities that are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made

ex: heating the factory, cleaning the offices, preparing annual reports to shareholder

3 essential characteristics of a successful activity-based costing implementation:

1. top managers must support ABC implementation

2. top managers must ensure that ABC data is linked to how people are evaluated and supported

3. A cross-functional team should be created to design and implement the ABC system

Steps for implementing ABC

1. Define activities, activity cost pools, and activity measures

2. Assign overhead costs to activity cost pools

3. Calculate activity rates

4. Assign overhead costs to cost objects using the activity rates and activity measures

5. Prepare management reports

First-stage allocation

overhead costs are assigned to activity cost pools in an activity-based costing system

- based off of results from interviews with employees

Second-stage allocation

activity rates are used to apply overhead costs to products and customers

plantwide overhead rate

a single predetermined overhead rate that is used throughout a plant

Activity-based management (ABM)

a management approach that focuses on managing activities as a way of eliminating waste and reducing delays and defects

- used in hospitals and U.S. Marine Corps

Benchmarking

a process by which a company compares its performance with that of high-performing organizations