Managerial Accounting Test

Cost Structure/Profit Volatility

- Cost structure refers to the proportion of variable costs and fixed costs in the total costs incurred during the period. - No one cost structure is the right one. Different industries have different cost structures and management may work to change the company's cost structure in response to changing business conditions and expectations.

Break Even Point

- Operating Income = 0 - Total revenue = total expenses - Fixed Expenses = Contribution Margin

Operating Leverage

- Operating leverage quantifies, at a given level of sales, the percent change in operating income caused by a percent change in sales. - - Leverage calculations are a two-step process: 1) First, calculate the Degree of Leverage or Leverage Factor Degree of Leverage = Contribution Margin Operating Income 2) Second, Percent change in = Degree of Leverage x Operating Income operating income

Target Profit

- Rather than setting operating income = 0, target profit calculations assume a certain operating income and calculate the sales dollars and units sold necessary to achieve it. - The same equations are used as to calculate the breakeven point, except that a non-zero operating income term is included in the numerator.

Contribution Income Statement

- Seperates expenses into variable and fix - Sales - Variable Expenses = Contribution Margin - Contribution Margin - Fixed Expenses = Net Income (Loss)

Contribution Margin

- The amount of sales available to cover fixed expenses with any remaining contribution margin providing profits - If the contribution margin is not sufficient to cover fixed expenses, there will be a net loss for the period

Margin of Safety

- The margin of safety is the excess of budgeted or actual sales over the break even volume of sales. - It is expressed as both the dollar amount of the difference and as a percent of budgeted or actual sales.

BreakEven Units

Fixed Expenses + Operating Income / Contribution Margin $ per unit

Break Even Sales

Fixed expenses + operating income / Contribution Margin Ratio

Contribution Margin Ratio

Sales, variable expenses and contribution margin are all variable, and therefore may be expressed as a percent of revenue. The contribution margin ratio is calculated as the contribution margin dollars as a percent of sales dollars. In a company producing a single product, this relationship applies to either total sales dollars and total contribution margin or per-unit sales dollars and contribution margin dollars. In a company producing multiple products, each product will have its own unique contribution margin ratio, with the contribution margin for the entire company calculated only for total contribution margin dollars as a percent of total sales dollars. The variable expense ratio is the complement to the contribution margin ratio. It represents the percent of sales dollars not included in the contribution margin ratio.