Accounting Ch. 19 and 20
Sales Mix
# of units sold of product A / total # products sold
Required Sales in Dollars
(FC + target income) / CMR
Required Sales in units
(FC + target net income) / CM per unit
Weighted Average C.M.
(Unit CM x Sales Mix) + (Unit CM x Sales Mix)
Weighted Average C.M.R.
(Unit CMR x Sales %) + (Unit CMR x Sales %)
weighted-average unit contribution margin?
(Unit Contribution Margin of R1 x Sales Mix Percentage of R1) + (Unit Contribution Margin of R2 x Sales Mix Percentage of R2).
different types of decisions involve incremental analysis
1. accept an order at a special price 2. make or buy component parts or finished product 3. sell product or process further 4. retain or replace equipment 5. eliminate an unprofitable business segment
management decision making process
1.identify the problem and assign responsibilties 2. determine and evaluate possible course of action 3. make a decision 4. reviewv results
Sunk cost
A cost that cannot be changed or avoided by any present or future decision.
Absorption costing
A costing approach in which all manufacturing costs are charged to the product.
Variable costing
A costing approach in which only variable manufacturing costs are product costs, and fixed manufacturing costs are period costs (expenses).
Degree of operating leverage
A measure of the extent to which a company's net income reacts to a change in sales. It is calculated by dividing contribution margin by net income.
Theory of constraints
A specific approach used to identify and manage constraints in order to achieve the company's goals.
Margin of Safety=
Actual / Estimated - Break Even Sales
Degree of Operating Leverage =
CM / NI
Contribution Margin Ratio=
CM / Sales
CM per Limited Resource =
CM per Unit / Limited Resource
Break Even Point in Dollars
FC / CMR (weighted?)
Costs that are the same under all alternative courses of action sometimes affect the decision.
False
In making business decisions, management ordinarily considers only financial information because it is objectively determined.
False
Variable costs will change under alternative courses of action, but fixed costs will not.
False
When using incremental analysis, some costs will always change under alternative courses of action, but revenues will not.
False
Break Even Point in Units
Fixed Cost / CM per unit
Joint costs
For joint products, all costs incurred prior to the point at which the two products are separately identifiable (known as the split-off point).
true
If a company decides to eliminate an unprofitable segment, its net income will increase if the segment's contribution margin is less than the fixed costs which are eliminated.
Identify the relevant costs in a make-or-buy decision.
In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved as well as changes to fixed manufacturing costs, (b) the purchase price, and (c) opportunity cost.
Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product.
In deciding whether to eliminate an unprofitable segment or product, the relevant costs are the variable costs that drive the contribution margin, if any, produced by the segment or product. Disposition of the segment's or the product's fixed expenses and opportunity cost must also be considered.
Describe the concept of incremental analysis.
Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives.
Total CM per limited resource =
Limited Resource x CM per limited resource
Margin of Safety Ratio=
Marginal of Safety / Actual / Estimated
Joint products
Multiple end-products produced from a single raw material and a common production process.
Vegas Company is considering eliminating an unprofitable segment. The segment's fixed costs are avoidable and are less than its contribution margin. Which of the following is a true consequence of eliminating this unprofitable segment?
Overall net income will decrease
Sales - Variable Cost = Fixed Cost + Net Income (or)
Sales - VC - FC = NI
Contribution Margin=
Sales - variable costs
Describe the essential features of a cost-volume-profit income statement.
The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement.
Quantitative factors
can be expressed in monetary terms
a high degree of operating leverage
exposes a company to greater earnings volatility risk.
Qualitative factors
include customer satisfaction
order at special price should be accepted if
incremental revenue with the order exceeds the incremental costs
process further as long as
incremental revenue(is the in increase sales which results from processing the product further) from such proceessing exceeds the incremental processing costs
The break even point
is the point where total sales equals total variable costs plus total fixed costs
Sales Mix
is the relative percentage in which a company sells its multiple products. OR a measure of the relative percentage in which a company's products are sold.
what is irrelevant in deciding to sell or process further?
joint costs
Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:
qualitative
Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision-making process, these costs are considered to be:
quantitative
In order to maximize profits when limited resources are available a company should concentrate on the producing products with:
the highest contribution margin per unit of limited resource.
Given that total sales remain the same, net income
will be greater if more higher contribution margin units are sold than lower contribution units
A company should sell more units of products
with a higher contribution margin in order to cover fixed costs and produce net income
Identify the relevant costs in determining whether to sell or process materials further.
The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs.
Operating leverage
The extent to which a company's net income reacts to a change in sales. Operating leverage is determined by a company's relative use of fixed versus variable costs.
Apply basic CVP concepts. List the five components of cost-volume-profit analysis
The five components of CVPanalysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit,(d) total fixed costs, and (e) sales mix
Opportunity cost
The potential benefit that is lost when one course of action is chosen rather than an alternative course of action.
Incremental analysis
The process of identifying the financial data that change under alternative courses of action.
Sales mix
The relative percentage in which a company sells its multiple products.
Cost structure
The relative proportion of fixed versus variable costs that a company incurs.
Identify the relevant costs in accepting an order at a special price.
The relevant costs are those that change if the order is accepted. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. Any changes in fixed costs, opportunity cost, or other incremental costs or savings (such as additional shipping) should be considered.
Identify the relevant costs to be considered in repairing, retaining, or replacing equipment.
The relevant costs to be considered in determining whether equipment should be repaired, retained, or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered.
Relevant costs
Those costs and revenues that differ across alternatives.
The process used to identify the financial data that change under alternative courses of action is called incremental analysis.
True
