Acct 202 exam 3

what is cost-volume-profit (CVP) analysis

is the study of the effects of changes in costs and volume (quantity) on a company’s profit

what are the basic components of cost-volume-profit analysis

• volume or level of activity (quantity)

• unit selling price

• unit variable costs

• total fixed costs

• sales mix

What are the five assumptions CVP

• The behavior of both costs and revenues is linear throughout the relevant range of the activity index

• Costs can be classified accurately as either variable or fixed

• Changes in activity are the only factors that affect costs

• all units produced are sold

• when more than one type of product is sold, the sales mix will remain constant

what is the contribution margin

amount of revenue remaining after deducting variable costs

what is the formula for contribution margin

total revenues - variable costs

What is the formula for unit contribution margin

unit selling price - unit variable costs

what does contribution margin ratio do

shows the percentage of each sales dollar available to apply toward fixed costs and profits

what is the formula for contribution margin ratio

unit contribution margin/unit selling price

Why is the break-even point useful to management

helps management consider decisions such as

• introduce new product lines

• changes sales prices on established products

• enter new markets

where does break-even occur

where total sales equal variable costs plus fixed costs, i.e, net income is zero

true or false: can the break-even point be computed using either unit contribution margin or contribution margin ratio

true

what is the formula for break-even point in sales units

fixed costs/unit contribution price

what is the formula for break-even point in dollars

fixed cost/contribution margin ratio

Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25%. If Gossen will break even at this level of sales, what are the fixed costs?

$200,000

total sales= 200,000 × $4= $800,000

break even sales= $800,000/.25= 200,000

What is the formula for target net income

sales - variable costs - fixed costs

what is the formula for sales in units

(fixed costs + target net income) / unit contribution margin

What is the formula for sales in dollars

(fixed costs + target net income) / contribution margin ratio

what is the formula for margin of safety in dollars

actual (or expected) sales - break-even sales

what is margin of safety

measures the “ cushion” that a particular level of sales provides

what is the formula for margin of safety ratio

margin of safety in dollars / actual (or expected sales)

Marshall Company had actual sales of $600,000 when break-even sales were $420,000. what is the margin of safety ratio

30%

600,000-420,000= 180,000 margin of safety in dollars

180,000/600,000= 30%

is the CVP income statement for internal or external use

internal use only

What does margin of safety in dollars tell company

how far sales can drop before the company will operate at a loss

sales mix

is the relative percentage in which a company sells its products

What is the formula for weighted average unit contribution margin

(unit contribution margin x sales mix percentage) + (unit contribution margin x sales mix percentage)

what is the formula for weighted average contribution margin

(contribution margin ratio x sales mix %) + (contribution margin ratio x sales mix %)

If the unit contribution margin is $15 and it takes 3.0 machine hours to produce the unit, the contribution margin per unit of limited resources is

$5

15/3.0

cost structure

is the relative proportion of fixed versus variable costs that a company incurs

what can increase a companies risk

an increase reliance on fixed costs

operating leverage

• extent that net income reacts to a given change in sales

• Higher fixed costs relative to variable costs cause a company to have higher operating leverage

• When sales revenues are increasing, high operating leverage means that profits will increase rapidly

• When sales revenues are declining, too much operating leverage can have devastating consequences

what is the formula for degree of operating leverage

contribution margin/ net income

budget

formal written statement of management’s plans for a specified future time period, expressed in financial terms

control device

important basis for performance evaluation once adopted

What are accountants normally responsible for

presenting management’s budgeting goals in financial terms

what benefits of budgeting

1. requires all levels of management to plan ahead

2. provided definite objectives for evaluating performance

3. creates an early warning system for potential problems

4. facilitates coordination of activities within the business

5. results in greater management awareness of the entity’s overall operations

6. it motivated personnel throughout the organization to meet planned objectives

what is essential for effective budgeting

• based on research and analysis with realistic goals

• depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined

• accepted by all levels of management

When is the budget prepared

may be prepared for any period of time

• most common- one year

• supplement with monthly and quarterly budgets

base budget is based on what

on past performance

• collect data from organizational units

• begin several months before year-end

a budget is in the framework of what

within the framework of a sales forecast

• shows potential industry sales

• shows the company’s expected share of sales

what are factors considered in sales forecasting

1. General economic conditions

2. Industry Trends

3. market research studies

4. anticipated advertising and promotion

5. previous market share

6. changes in prices

7. technological developments

participative budgeting

Each level of management should be invited to participate

• may inspire higher levels of performance or discourage additional effort

what are advantages to participative budgeting

• more accurate budget estimates because lower-level managers have more detailed knowledge

• perceive process as fair due to involvement of lower-level management

overall goal- produce fair and achievable budget while still meeting corporate goals

What are disadvantages of participative budgeting

• can be time-consuming and costly

• can foster budgetary “ gaming” through budgetary slack

budget committee

The responsibility for coordinating the preparation of the budget is assigned to a budget committee. The budget committee usually includes the:

•president

•treasurer

•chief accountant (controller)

•management personnel from each major area of the company (such as sales, production, and research)

what are the three differences between budgeting and long-range planning

1. time period involved

   1. long-range planning → usually at least five years

2. emphasis

3. amount of detail presented

long-range planning

identifies long-term goals, selects strategies to achieve those goals, and develops policies and plans to implement the strategies. long-range plans contain considerably less detail than budgets

sales budget

• first budget prepared

• derived from sales forecast

  • management’s best estimate of sales revenue

• every other budget depends on sales budget

What is the formula for required production units

expected sales + desired ending finished goods units - Beg finished goods units

what does production budget show

units that must be produced to meet anticipated sales

• derived from sales budget plus the desired change in ending finishing goods inv.

• essential to have a realistic estimate of ending inv.

cash budget

shows anticipated cash flow

contains three sections

1. cash receipts

2. cash disbursements

3. Financing

cash budget concepts

• must prepare in sequence

• ending cash balance of one period is the beginning cash balance for the next

• data obtained from other budgets and from management

• often prepared for the year ona monthly basis

• contributes to more effective cash management

• shows managers the need for additional financing before actual need arise

• indicates when excess cash will be available

what is the formula for required merchandise purchases

budgeted cost of goods sold + desired ending merchandise inv- beg. merchandise inv

budgetary control

Use of budgets in controlling operations

how does budgetary control work best

When a company has a formalized reporting system which:

1. identifies the name of the budget report

2. states the frequency of the report

3. specifies the purpose of the report

4. indicates the primary recipients(s) of the report

sales in the budgetary control reporting system

frequency: weekly

purpose: determine whether sales goals are met

primary recipients: top management and sales management

labor in the budgetary control reporting system

frequency: weekly

Purpose: control direct and indirect labor costs

primary recipients: vice president of production and production department mangers

scrap in the budgetary control reporting system

frequency: daily

Purpose: Determine efficient use of materials

primary recipients: production managers

static budget

is a projection of budget data at a single level of activity

a static budget is useful in controlling costs when behavior is

fixed

flexible budget

projects budget data for various levels of activity

• essentially a series of static budgets at different activity levels

• The budgetary process is more useful if it is adaptable to changes in operating conditions

• can be prepared for each type of budget in the master budget

At 9,000 direct labor hours, the flexible budget for indirect materials is $27,000. If $28,000 of indirect materials costs are incurred at 9,200 direct labor hours, the flexible budget report should show the following difference for indirect materials:

$400 unfavorable

$27,000 / 9,000 hr.=$3.00 per hour

$3.00 per hr. x 9,200 hr. = $27,6000

now $27,600 compared to $28,000 is unfavorable because we predicted lower costs than occurred

standard costs

are common in business and represent predetermined unit costs, which companies use as measures of performance

what is the difference between standards and budgets

a standard is a unit amount

a budget is a total amount

ideal standards

represent optimum levels of performance under perfect operating conditions

normal standards

represent efficient levels of performance that are attainable under expected operating conditions

• should be rigorous but attainable

most companies that use standards set the at an

normal level