ACCT 202 - CH 5, 6, 7

sales mix [formula]

(CM% on total sales)Q - F = 0

advantages of budgeting

1) overarching: planning forward + control back 2) specific: - communicate management plans - forces employees to think and plan - allocating resources - identify bottlenecks - coordinate organization - define benchmark

good budgets

1) participate 2) budget periods / rolling budget 3) highly achievable 4) no budgetary slack

factors to impact product

1. Selling prices (P) 2. Sales volume (Q) 3. Unit variable costs (V) 4. Total fixed costs (F) 5. Mix of products sold (AA vs. BB)

degree of operating leverage [formula]

CM / net operating income

contribution margin [formula]

CM = P - V contribution margin = price - variable cost

contribution margin ratio (CM ratio) [formula]

CM ratio = CM / sales

contribution margin percent [formula]

CM% = CM / P contribution margin percent = contribution margin / price

contribution margin

Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. Thus, it is the amount available to cover fixed expenses and then to provide profits for the period. Contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits - sufficient = profit - not sufficient = loss How much to cover fixed costs and generate profit

cost-volume-profit (CVP)

Cost-volume-profit helps managers make many important decision such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain. Its primary purpose is to estimate how profits are affected by the following five factors: 1. Selling prices (P) 2. Sales volume (Q) 3. Unit variable costs (V) 4. Total fixed costs (F) 5. Mix of products sold (AA vs. BB)

Where do absorption or variable end up in?

Either inventory or CGS

What happens if the amount produced is greater than what you sold?

O/H on income statement will be lower under absorption

profit [formula]

Profit = (P - V)Q - F Profit = (Sales - Variable expenses) - Fixed expenses

profit (formula) - in terms of Unit CM

Profit = Unit CM x Q - Fixed expenses

CM ratio

Shows how the CM will be affected by a change in total sales

What happens hone you produce more than you sell?

Some fixed O/H deferred til items sold

break-even point

The break-even point is the level of sales at which profit is zero - once break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold

contribution margin ratio (CM Ratio)

The contribution margin ratio is the contribution margin as a percentage of sales - the contribution margin ratio can be used in cost-volume-profit calculations

cost-volume-profit (CVP) graph

The relationships among revenue, cost, profit, and volume are illustrated on a cost-volume-profit (CVP) graph - highlights CVP relationships over wide ranges of activity

variable expense ratio

The variable expense ratio is the ratio of variable expenses to sales - computed by dividing the total variable expenses by the total sales, or in a single product analysis, it can be computed by dividing the variable expenses per unit by the unit selling price

target profit analysis

We estimate what sales volume is needed to achieve a specific target profit

budget

a detailed plan for the future that is usually expressed in formal quantitative terms

cash budget

a detailed plan showing how cash resources will be acquired and used

operating leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales - acts as a multiplier - higher the OP leverage = more sensitive income is to sales choice between fixed and variable costs less variable gives us more impact on income with changes in sales

segment reporting

an identifiable part of your business - the segment margin is the best gauge of the long-run profitability of a segment because it includes only shoe costs that are used by the segment reporting structure - can report any segmentation you'd like

change in contribution margin [formula]

change in CM = CM ratio x change in sales

change in profit [formula]

change in profit = CM ratio x change in sales - change in fixed expenses

In absorption we can _____ fixed overhead in the same period it occurs

defer

direct materials budget

details the raw materials that must be purchased to fulfill the production budget and to produce for adequate inventories

financial reporting

financial - external (general, summarized) - past - investors / creditors - absorption

manufacturing overhead budget

lists all costs of production other than direct materials and direct labor

production budget

lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending finished goods inventory

managerial reporting

managerial - internal (detailed) - forecast future

margin of safety [formula $]

margin of safety in dollars = total budgeted (or actual) sales - break-even sales

theory of constraints

only do as well as highest constraint / bottleneck

variable costing

only those manufacturing costs that vary with output are treated as product costs - DM, DL, VOH FOH not part of it bc = expense

master budget

organizations strive to achieve their financial goals by preparing a number of budgets that together form an integrated business plan known as the master budget - an essential management tool that communicates management's plans throughout the organization, allocates resources, and coordinates activities - collection of other detailed budgets

price [formula]

price = cost + profit - cost is variable and fixed

deferral

push off

sales mix

refers to the relative proportions in which a company's products are sold - idea is to achieve the mix that will yield the greatest profits - profits will be greater if high margin rather than low margin items make up a relatively large proportion of total sales

direct labor budget

shows the direct labor hours required to satisfy the production budget

ending finished goods inventory budget

shows unit cost times number of ending units - goes to balance sheet

margin of safety

the excess of budgeted or actual sales dollars over the break-even volume of sales dollars - amount by which sales can drop before losses are incurred

sales budget

the first step in the budgeting process - a detailed schedule to showing the expected sales for the budget period - an accurate sales budget = key to the entire budgeting process

recognition

to record

absorption costing

treats all manufacturing costs as product costs, regardless of whether they are variable or fixed - DM, DL, VOH, FOH AKA "full cost method"

variable expense ratio [formula]

variable expense ratio = variable expenses / sales