Exam 2 Man. Acc. (4, 6, 7)

Chapter 4

Allocating Overhead

• Predetermined Overhead Rate: Total est. Indirect costs divided by a cost driver

• department overhead rates: allocated to each department, still uses one cost driver (best for companies with one product or service)

• activity cost allocation: different cost allocation bases for each different activity.

Reasons Indirect Costs can be Skewed by Trad. Method

• many different jobs use diff amount of resources

• profits and losses don’t make sense

• profit margin decreases

Creating ABC System

• storyboarding: visualization tool to sequence events

• activity dictionary: defines an activity and resources used and time spent

• cost hierarchy:

  • unit level: single units or product

  • batch level: multiple units

  • product and customer level: specific product lines or customer

  • facility level: all of companies processes

Steps to ABC

1. est. total indirect costs w/ each activity

2. find allocation base and total expected activity for each activity

3. est. total quantity of each base

4. activity cost allocation rate = activity cost/ activity volume

5. assign indirect costs = allocation rate x actual quantity

ABC in Managerial Decision Making

• how processes can be improved

• value added activities: necessary efficient and customers will pay for

• non value added activities: necessary or inefficient

• assist with pricing, cutting costs, routine and control decisions

Drawbacks to ABC

• complex to create

• internal use only (not GAAP)

• must be supported by all areas or will not work

• consider cost benefits

Chapter 6

Cost Behavior

• Variable Costs: changes in proportion to volume

  • VC per unit: same for each product

  • VC graph: starts at (0,0) rises up in straight line

• Fixed Costs: do not change regardless of volume

  • FC per unit: decreases as volume increase

  • FC graph: begins at y where costs is, straight horizontal line

• Mixed Costs: Change but not in direct proportion to volume, has added component

  • examples: commission, utilities, sell phones, some insurance with base costs

  • increases as volume increases

  • decrease as volume decreases

Cost Equation

• y = mx+b

  • y: total costs

  • m: variable costs per unit

  • x: units

  • b: fixed costs

Other Info

• relevant range: range where costs remain constant

• step cost: fixed over a range, then increases

• sunk costs: paid with no reward

Determining Cost Behavior

• accounting analysis: determines if costs is fixed, variable or mixed

• high low method: useful for mixed costs,

  • variable cost per unit formula: (high cost - low cost)/(high activity - low activity)

  • Total cost = plug variable cost per unit into cost equation

• regression analysis: helps find most exact calculation of fixed and variable costs

  • r² : strength of relationship between cost an volume, 0 = none, 1 = perfect

  • y intercept coefficient: fixed cost

  • x intercept coefficient: variable cost per unit

How Does It Help?

• variable cost scan be eliminated by reducing volume

• fixed cost cannot be eliminated, shows it can be better to make more product than get rid of product line if losing money

Contribution Margin Income Statement

• Sales Revenue - Variable Costs = Contribution Margin - Fixed Costs = Net Income

Absorption vs Variable Costing

• GAAP Income Statement: Sales - COGS = Gross Profit - SGA Exp = Net Income, only expense fixed overhead until items are sold

• Variable Cost: Not acceptable GAAP, expenses all fixed cost as incurred , regardless of when product is sold

• Contribution Margin: amount of sales revenue that isnt going into variable costs, all profit (sales price - variable costs)

• FOH absorption - inventory until sold; FOH variable: expensed as period cost

Chapter 7

CVP Analysis

• relationship between costs volume and profit

• formula for profit: profit: revenues - variable costs - fixed cost

• revenues: sales price x unit sold

• variable costs: vc x unit sold

• fixed cost stay the same within relevant range

CVP Assumption

• change in volume is the only factor that affects cost (disounts aren’t accounted for)

• only variable or fixed ( no mixed)

• inventory doesn’t differ

• sales mix doesnt change

Unit Contribution Margin

• used to determine margin breakeven and target profit amounts

• Sales Revenue (sales /units) - variable costs (VC/units) = CM - Fixed cost (FC/units) = net income aka operating income

• Contribution Margin Ratio: CM/Sales Revenue

• sales price: VC/100% - cont ratio

• Breakeven: (Fixed costs + net income)/ contribution margin per unit

• target net income: (fixed cost + desired net income) / contribution margin per unit

• Margin of safety: budget revenue - break even

• operating leverage factor = cont margin/ operating income