ACC 203 exam 3

Contribution Margin

The amount left over from the selling price after all varible costs have been subtracted which can then be used to cover fixed costs and generate profits

Contribution margin ratio

Shows % of each sales $ available to cover fixed expenses and profit

Breakeven point

Sales level at which operating income is zero; sales below the breakeven point result in a loss, while sales above the breakeven point provides profit

Sales Mix

Combination of products that make up total sales; if your sales mix includes more than one product, the weighted average contribution margin (WACM) must be calculated

Margin of Safety

Excess of expected sales over breakeven sales or drop in sales the company can absorb without incurring a loss

Price Takers

• Not a custom or unique product

• Not branded

• Intense competition

• Target costing

Constraints

Restricted amount of product that can be manufactured or sold

Performance report

Compares actual revenues and expenses to budgeted figures

Variance

Difference between actual and budget. Favorable variance ^ operating income. Unfavorable variance (less) operating income. Revenues: higher than budgeted F / lower than budgeted U. Expenses: higher than budgeted U / lower than budgeted F

Management by exception

Only investigate budget variance of a certain size

Segment Margin

The operating income generated by a profit center before subtracting common fixed costs. Examples of common fixed costs: HR, Legal, IT, Payroll.

Purpose of a segment margin

Separate fixed costs into what a manager could and could not control

Return on Investment

Measures the amount of income an investment center earns relative to the size of its assets, stated as %; allows for comparison of projects of different sizes; compares divisions, divisions across time, and with other companies in the same industry; helps decide where to invest extra funds

Sales Margin

Shows hoe much operating income is earned for each $ of sales, stated as %

Capital turnover

Shows sales generated with each $ of assets

Residual Income

Positive means meeting targeted rate of return, negative not meeting

Transfer pricing

Price charged for an internal sale between 2 different divisions of the SAME company; Encourage only if the company as a whole benefits. Strategies to determine: Market Price, Negotiated Price, Cost or Cost Plus Pricing

Vertical integration

Purchasing other companies within one’s supply chain to maximize profits

Master Budget Variance

Difference between actual revenues and expenses for the actual volume and the master (or static) budget for the budgeted volume

Flexible Budget

Budget prepared for the actual level of volume achieved

Volume Variance

Difference between the master budget and the flexible budget, which is due only to the difference in volume.

Flexible Budget Variance

Difference between the flexible budget and the actual result which results from causes other than volume

Lag Indicators

Based on past actions such as financial performance measures

Lead Indicators

Predict future performance