Indiana University A100 Equations

Simple Income Statement

Revenue - Expenses = Net Income/Loss

Multistep Income Statement

Revenue - Cost of Goods sold = Gross Income

Gross Income - Operating Expenses = New Income/Loss

Contribution Margin Income Statement

Sales - Variable Costs = Contribution Margin

Contribution Margin - Fixed Costs = Net Income/Loss

Total Product Costs

Direct Materials + Direct Labor + Manufacturing Overhead

Breakeven Point In Units

Total Fixed Costs / Contribution Margin Per Unit

Sales in Units to achieve a Target Profit

(Total Fixed Costs + Target Profit) / Contribution Margin per Unit

Return on Investments

Operating Income / Average Operating Assets

Residual Income

Operating Income - (Minimum Rate of Return x Average Operating Assets)

Margin of Safety

Number of Expected Units - Number of Units to Breakeven

Managerial Accounting

Used internally, and focus is on future endeavors whereas financial focuses on current

Cost of Inventory (COGS)

Direct Materials

+Direct Labor

+Manufacturing Overhead

Types of Inventory Accounts

Raw material inventory (materials before use), Work-In-Process Inventory (unfinished products), Finished Goods Inventory (ready to sell products)

Product Costs (relation)

Related to manufacturing (expensed when goods are sold)

Period Costs

Administrative and selling expenses (expensed in the period incurred)

Fixed Costs

Do not change with production level (ex. rent, executive salaries)

Variable Costs

Change with production (ex. raw materials, commissions)

Relevant Range

Fixed and variable costs remain stable within a certain production range

Breakeven point net income

0

Cost Volume Profit (CVP) Analysis

Helps managers analyze how changes in production levels, pricing, and costs affect profitability

If Variable costs increase, contribution margin _____ and breakeven point ____

decreases, increases

If variable costs decrease, contribution margin ___ and breakeven point ___

increases, decreases

Relevant Costs

Direct Materials, Direct Labor, and Variable costs (Opportunity costs if applicable)

Irrelevant costs

Fixed costs, sunk costs

Centralizaiton

Top management makes all decisions

Decentralization

Lower level managers make decisions for their area