Differential Analysis The Keyto Decision Making

Managerial Acounting Equations/Things to Know for Final Cost of Goods Sold= Cost of Goods Manufactured= costs associated with the goods that were finished during the period Predetermined Overhead Rate= estimated total manufacturing overhead cost / estimated total amount of the allocation base Applied Manufacturing Overhead= predetermined overhead rate x amount of the allocation base incurred by the job Total Equivalent Units= Finished Goods + Units in Ending Inventory x(% completed) Cost per Equivalent Unit= (Cost of Beg. WIP Inventory + Cost added during the period) / equivalent units of production High-Low Method: Break-Even Point in Units= fixed expenses / unit contribution margin Break-Even Point in Dollars= fixed expenses / cmratio Unit Sales to attain target profit= Target Profit + Fixed expenses / CMper unit Dollar Sales to attain the target profit= Target profit + fixed expenses/ CM ratio Sales Mix: Contribution Margin= Contribution Margin Ratio= Variable Costing Net Income: Absorption Costing Net Income: price variance= actual quantity(actual price – standard price) quantity variance= standard price(actual quantity – standard quantity) Material and Labor variances material price variance= AQ(AP–SP) material quantity variance= SP(AQ–SQ) labor rate variance= AH(AR–SR) labor efficiency variance= SR(AH–SH) ROI= net operating income / average operating assets Residual Income= net operating income – minimum required return (x average operating assets) Capital Turnover= sales / average operating assets Sales Margin= net operating income / sales Review Product Costs and Period Costs: Product Costs: any cost associated with manufacturing direct material direct labor manufacturing overhead expensed only when the product is sold Period Costs: any non-manufacturing cost expensed right away Job-Order Costing, Process-Costing, Activity-Based Costing job-order costing: unique products applied overhead: deciding overhead using a predetermined overhead rate instead of waiting for the actual cost POHR= estimated [budgeted] MOH / estimated overhead driver [ex: machine or labor hours] actual overhead: process-costing: similar products uses equivalent units to assign costs total equivalent units= completed units + units still in ending work in process (% completion) Variable Cost and Fixed Cost contribution margin break-even: zero profit break-even point in units= fixed expenses / unit contribution margin break-even points in sales dollar= fixed expense / contribution margin ratio Chapter 14: Differential Analysis: The Key to Decision Making Relevant Cost and Benefits relevant cost: a cost that differs between alternatives avoidable cost: a cost that can be eliminated, in whole or in part, by choosing one alternative over another relative benefit: a benefit that differs between alternatives unavoidable cost: irrelevant costs market value and current value are relevant two broad categories of costs are never relevant in any decision. They include: sunk costs a future cost that does not differ between the alternatives Decision Making: A Two-Step Process 1. eliminate costs an benefits that do not differ between alternatives 2. use the remaining costs and benefits that differ between… The Make or Buy Decision When a company is involved in more than one activity in the entire value chain, it is vertically integrated make or buy decision: A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier if a machine has resale value, it has opportunity costs associated with it no resale value means no opportunity cost Chapter 11: Performance Measurement in Decentralized Organizations Map Decentralized Organizations centralized vs. decentralized organizations centralized: one person or small group makes all decisions appropriate for small companies decentralized: many decision makers spread throughout the business control of operations are delegated organized by function or location Responsibility Centers: Cost Center Profit Center (must be able to control revenue and cost) Investment Center (performance measured by residual income and ROI ROI= net operating income / average operating assets residual income= income – minimum required return (x average operating assets) manufacturing cycle efficiency= value-added time / manufacturing cycle time value-added time is process time The Balance Scorecard Performance Measures: financial internal business processes customer learning and growth Chapter 10 Why do we Need Standards: 1. . 2. . 3. Simplify accounting management by exception: managers focus on quantities and costs that exceed standards price standards: specify how much should be paid for each unit of input final, delivered cost of materials, net of discounts quantity standards: specify how much of an input should be used to make a product or provide a service use product design specifications rate standards: use wage surveys and labor contracts the rate is the variable portion of the predetermined overhead rate time standards: use time and motion studies for each labor operation activity standards: the activity is the base used to calculate the predetermined overhead rate price variance= actual quantity(actual price – standard price) quantity variance= standard price(actual quantity – standard quantity) Material and Labor variances material price variance= AQ(AP–SP) material quantity variance= SP(AQ–SQ) labor rate variance= AH(AR–SR) labor efficiency variance= SR(AH–SH) Midterm 2 Study Guide Chapter 5: Cost-Volume-Profit Relationships Contribution Format Income Statement (know how to prepare this) Unit contribution margin = sales price per unit – variable cost per unit Contribution margin ratio = unit contribution margin / sales price per unit or = total contribution margin / sales revenue Break-Even Point: in units: fixed cost/unit contribution margin in dollars: fixed cost/contribution margin Target Income: In Units: (fixed cost + target income)/unit contribution margin In Dollars: (fixed cost + target income)/contribution margin ratio Safety Margin (in dollars): Total budgeted (or actual) sales – Break-Even Sales Operating Leverage= Total Contribution Margin/Net Income CVP Graph (Understand It) unit volume represented on X-Axis dollars represented on Y=Axis Explanation: Chapter 6: Variable Costing and Segment Reporting Variable Costing vs Absorption Costing Variable Costing: A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs. Absorption Costing: A costing method that includes all manufacturing costs— direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs Chapter 9: Flexible Budget and Performance Analysis Chapter 8: Master Budgeting Two key purposes for budget: 1. planning 2. control Direct Labor Budget Units to be produced (from production budget) x… MOH Budget simple approach: variable overhead per unit x units produced + fixed overhead Activity Based Costing Chapter 6: Variable Costing and Segment Reporting Overview variable costing: product costs: DM, DL, variable MOH Period costs: Fixed MOH, variable selling and administrative expenses, fixed selling and administrative expenses absorption costing results in higher net income because more costs are stored in inventory when sales > production variable costing not allowed by GAAP percentage increase in sales is the same percentage increase in contribution margin, and vice versa Chapter 5: Cost-Volume-Profit Relationships CM ratio= Profit per unit/cost per unit or =total sales – total variable expense / sales total cm= total sales – total variable expenses Break-even in Unit Sales: Equation Method profits= Unit CM x Q – Fixed Expenses or, more intuitively: Unit Sales to Break-even= Fixed Expenses / CM per unit Break-even in Dollar Sales: Equation Method Profit= CM ratio x Sales – Fixed expenses or Dollar sales to break even= fixed expenses / cm ratio Target Profit Analysis computing the number of units that must be sold to attain a target profit using either: equation method formula method Formula method for number of units: Profit= Unit Sales to attain target profit= Target Profit + Fixed expenses / CMper unit Formula method for number of dollar sales: dollar sales to attain the target profit= Target profit + fixed expenses/ CM ratio Margin of Safety in Dollars margin of safety in dollars is the excess of budgeted (or actual) sales over the breakben volume of sales Margin of safety in dollars= Total sales – Break-even Sales Margin of safety in units= safety margin/unit price Cost Structure and Profit Stability Cost Structure: refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization’s cost structure