Managerial Accounting: Chapters 5, 6, 8, and 9

Vocabulary practice flashcards covering Cost-Volume-Profit relationships, variable and absorption costing, master budgeting schedules, and flexible budget performance analysis.

Contribution Margin (Definition & Formula)

The amount remaining from sales revenue after variable expenses have been deducted, representing the amount available to cover fixed expenses and provide profits.

$$\text{Contribution Margin} = \text{Sales Revenue} - \text{Variable Expenses}$$

Total Contribution Margin vs. Unit Contribution Margin Formulas

• Total Contribution Margin: $\text{Total CM} = \text{Sales Revenue} - \text{Total Variable Expenses}$

• Unit Contribution Margin: $\text{Unit CM} = \text{Selling Price per Unit} - \text{Variable Cost per Unit}$

Contribution Margin Ratio and Variable Expense Ratio

• Contribution Margin Ratio: $\frac{\text{Contribution Margin}}{\text{Sales Revenue}} \quad \text{or} \quad \frac{\text{Unit CM}}{\text{Selling Price}}$

• Variable Expense Ratio: $\frac{\text{Variable Expenses}}{\text{Sales Revenue}}$

Break-Even Point and Target Income in Units (Formula Method)

$$\text{Unit Sales} = \frac{\text{Fixed Expenses} + \text{Target Profit}}{\text{Unit Contribution Margin}}$$

Setting Target Profit to $0$ gives the break-even point in units.

Break-Even Point and Target Income in Sales Dollars (CM Ratio Method)

$$\text{Dollar Sales} = \frac{\text{Fixed Expenses} + \text{Target Profit}}{\text{Contribution Margin Ratio}}$$

Setting Target Profit to $0$ gives break-even sales revenue.

Output Metrics of Unit CM Method vs. CM Ratio Method

• Unit Contribution Margin method: Yields the break-even answer in units.

• Contribution Margin Ratio method: Yields the break-even answer in sales revenue dollars.

Impact of an Increase in Selling Price on CVP Elements

Increases Unit Contribution Margin and Contribution Margin Ratio, which decreases the break-even point and target income volume.

Impact of an Increase in Variable Cost on CVP Elements

Decreases Unit Contribution Margin and Contribution Margin Ratio, which increases the break-even point and target income volume.

Impact of an Increase in Fixed Cost on CVP Elements

Has no effect on Unit Contribution Margin or Contribution Margin Ratio, but increases the break-even point and target income volume.

Margin of Safety (MOS) and Risk Relationship

The excess of budgeted or actual sales dollars over break-even sales dollars. A higher margin of safety indicates a lower risk of incurring a loss if sales decline.

• $\text{MOS in Dollars} = \text{Total Sales} - \text{Break-Even Sales}$
• $\text{MOS Percentage} = \frac{\text{MOS in Dollars}}{\text{Total Sales in Dollars}}$

R-squared in Least-Squares Regression Analysis

A measure of goodness of fit that shows the percentage of variation in variable cost explained by variation in activity volume. A higher percentage indicates a better fit.

Cost Formula Components ($Y = aX + b$)

• $a$ (slope coefficient): Variable cost per unit

• $b$ (intercept constant): Total fixed cost

Income Statement Cost Presentation: Absorption Costing vs. Variable Costing

• Absorption costing: Categorizes costs by function (Cost of Goods Sold versus Operating Expenses) to show Gross Margin.

• Variable costing: Categorizes costs by behavior (Variable versus Fixed) to show Contribution Margin.

Product vs. Period Cost Classifications (Absorption vs. Variable)

• Absorption Costing: Direct Materials, Direct Labor, Variable MOH, and Fixed MOH are Product Costs; S&A expenses are Period Costs.

• Variable Costing: Direct Materials, Direct Labor, and Variable MOH are Product Costs; Fixed MOH and all S&A expenses are Period Costs.

Absorption Costing Income Statement Preparation

1. $$\text{Sales Revenue} - \text{Cost of Goods Sold} = \text{Gross Margin}$$

2. $$\text{Gross Margin} - \text{Selling and Administrative Expenses} = \text{Net Operating Income}$$

Variable Costing Income Statement Preparation

1. $\text{Sales Revenue} - \text{Variable Expenses} = \text{Contribution Margin}$
2. $\text{Contribution Margin} - \text{Fixed Expenses} = \text{Net Operating Income}$

Cause of Difference in Net Operating Income (Absorption vs. Variable Costing)

Caused entirely by the timing of when Fixed Manufacturing Overhead is expensed. Under absorption costing, fixed MOH is attached to inventory and deferred on the balance sheet when inventory increases, or released when inventory decreases.

Net Operating Income Relations: Production vs. Sales Volumes

• Production = Sales: Absorption Income = Variable Income
• Production > Sales: Absorption Income > Variable Income
• Production < Sales: Variable Income > Absorption Income

Absorption and Variable Income Reconciliation Formulas

$$\text{Fixed MOH Deferred or Released} = \text{Fixed MOH per Unit} \times (\text{Units Produced} - \text{Units Sold})$$

$$\text{Absorption Operating Income} - \text{Variable Operating Income} = \text{Fixed MOH Deferred or Released}$$

Required Costing Method for GAAP External Reporting

Absorption costing must be used for external financial reporting under GAAP.

Budgeting: Purpose and Primary Advantages

Quantitative plans used for Planning (setting goals) and Control (executing plans).

Advantages:

• Future planning
• Communicating goals
• Allocating resources
• Coordinating managers
• Uncovering bottlenecks
• Evaluating performance

Self-Imposed / Participative Budgeting (Pros and Cons)

A budget prepared with the full cooperation of managers at all levels.

• Advantages: Higher manager commitment and operational insight.
• Disadvantages: Risk of managers building budgetary slack by padding budgets.

Master Budget Schedule Preparation Order

A collection of interdependent budgets prepared in the following order:

1. Sales Budget
2. Production Budget (or Inventory Purchases Budget)
3. Direct Materials Purchases, Direct Labor, and Manufacturing Overhead Budgets
4. Selling & Administrative Budget
5. Combined Cash Budget
6. Budgeted Income Statement
7. Budgeted Balance Sheet

Sales Budget (Purpose and Formula)

Sets forecasted unit and dollar sales, driving all other budgets.

$$\text{Budgeted Unit Sales} \times \text{Selling Price per Unit} = \text{Total Budgeted Sales}$$

Production Budget (Purpose and Formula)

Calculates required unit production.

$$\text{Budgeted Unit Sales} + \text{Desired Ending FG Inventory} - \text{Beginning FG Inventory} = \text{Required Production in Units}$$

Direct Materials Purchases Budget (Purpose and Formulas)

Determines raw materials needed for production and required purchases.

1. $(\text{Required Production} \times \text{RM per Unit}) + \text{Desired Ending RM Inventory} - \text{Beginning RM Inventory} = \text{Total RM to Purchase}$
2. $\text{Total Cost} = \text{Total RM to Purchase} \times \text{Cost per Unit}$

Direct Labor Budget (Purpose and Formula)

Estimates direct labor hours and labor costs.

$$\text{Required Production} \times \text{DL Hours per Unit} \times \text{DL Rate per Hour} = \text{Total Budgeted DL Cost}$$

Manufacturing Overhead Budget (Purpose and Formula)

Budgets all manufacturing costs other than direct materials and direct labor.

$$(\text{Variable MOH Rate} \times \text{Units Produced}) + \text{Total Fixed MOH} = \text{Total Budgeted MOH Expenses}$$

Inventory Purchases Budget for a Merchandiser (Purpose and Formula)

Calculates required merchandise inventory purchases from suppliers.

$$\text{Budgeted COGS} + \text{Desired Ending Inventory} - \text{Beginning Inventory} = \text{Total Required Inventory Purchases}$$

Selling and Administrative Expenses Budget (Purpose and Formula)

Budgets non-manufacturing operational expenses.

(\text{Variable S&A Rate} \times \text{Units Sold}) + \text{Total Fixed S&A} = \text{Total Budgeted S&A Expenses}

Cash Collections Budget vs. Cash Payments Budget (Purposes)

• Cash Collections Budget: Tracks expected receipts from cash sales and prior credit sales.

• Cash Payments Budget: Tracks expected disbursements for materials, labor, overhead, operating expenses, equipment, taxes, and dividends.

Planning Budget (Definition, Timing, and Preparation)

A budget prepared before the period begins for the planned level of activity using forecasted sales volume multiplied by budgeted cost rates.

Flexible Budget (Definition, Timing, and Preparation)

An estimate of what revenues and costs should have been for the actual level of activity achieved. Prepared at the end of the period using actual activity volume multiplied by budgeted variable rates plus fixed costs.

Activity Variance (Calculation and Cause)

$$\text{Activity Variance} = \text{Flexible Budget} - \text{Planning Budget}$$

Caused solely by differences between actual activity volume and planned activity volume.

Revenue and Spending Variances (Calculation and Causes)

$$\text{Revenue and Spending Variance} = \text{Actual Results} - \text{Flexible Budget}$$

Caused by price or cost differences rather than volume changes (such as changes in selling prices, material costs, wage rates, or operational waste).