ACCT 102: Chapters 17-20 EXAM 2
Sales in Dollars
(FC + Target Net Income)/CMR
Sales in units formula
(FC + Target Net Income)/CMR
weighted average unit contribution margin formula
(unit contribution margin x sales mix %)₁+ (unit contribution margin x sales mix %)₂
Types of unit-level activities
*Machine Related:* Drilling, cutting, milling, trimming, pressing *Labor Related:* Assembling, painting, sanding, sewing
Contribution Margin Ratio Formula
1) Contribution Margin / Sales 2) unit contribution margin/ unit selling price
Predetermined Overhead Rate
1) Estimated Overhead per Activity/ Estimated Use of Cost Drivers per Activity 2) estimated overhead/direct labor cost
Margin of Safety Ratio Formula
1) Margin of Safety in Dollars / Actual (Expected) Sales 2) (Actual sales - break-even sales)/actual sales
break-even point can be:
1. Computed from a mathematical equation. 2. Computed by using contribution margin. 3. Derived from a cost-volume-profit (CVP) graph.
Three primary benefits of activity-based costing (ABC)
1. Employs more cost pools and therefore results in more accurate product costing. 2. Leads to enhanced control over overhead costs. 3. Supports better management decisions.
Benefits of JIT Production
1. Significant reduction or elimination of manufacturing inventories. 2. Enhanced product quality. 3. Reduction or elimination of rework costs and inventory storage costs. 4. Production cost savings from the improved flow of goods through the processes.
Operating Income Formula
1. contribution margin - fixed costs 2. TR - DC
CVP Assumptions
1. no volume discounts 2. costs are linear throughout relevant range 3. revenues are linear in relevant range 4. inventory levels will not change 5. sales mix will not change
Absorption Costing
A costing approach in which all manufacturing costs are charged to the product.
Just-in-time (JIT) processing
A processing system dedicated to having the right amount of materials, parts, or products on hand, thereby reducing the amount of inventory and time the inventory is held.
Margin of Safety in Dollars
Actual (Expected) Sales - Break-Even Sales
VC per Unit
Change in Total Costs at High versus Low Activity Level ÷ High minus Low Activity Level
Degree of Operating Leverage Formula
Contribution Margin / Net Income
Types of batch-level activities
Equipment setups, purchase ordering, inspection, materials handling
Activity-based overhead rate formula
Estimated Overhead per Activity/ Estimated Use of Cost Drivers per Activity
BEP sales
FC/Unit contribution margin
Break even point in units (Q)
FC/weighted avg. unit CM
T/F: A traditional costing system assigns overhead by means of multiple overhead rates
False
T/F: As manufacturing processes have become more automated, more companies have chosen to assign overhead on the basis of direct labor costs
False
break-even point in dollars
Fixed Costs/CM Ratio
Types of facility-level activities
Plant management salaries, plant depreciation, property taxes, utilities, health and safety, interviews
Types of product-level activities
Product design, engineering changes
Net Income Equation
Revenues - Expenses
Contribution margin formula
Sales - Variable Costs
TFC
TC - (VC per unit × units produced)
T/F: Direct materials and direct labor costs are easier to trace to products than overhead.
True
T/F: In activity-based costing, an activity is any event, action, transaction, or work sequence that incurs cost when producing goods or performing services
True
Operating Income % difference
[Operating Income (ABC) − Operating Income (traditional cost)] ÷ Operating Income (traditional cost)
Variable costs vary in total directly and proportionately with what
changes in activity level. When activity level increases 10%, this also increases by 10%
fixed costs
costs that do not vary with production or sales level (activity level)
Examples of variable costs
include direct materials and direct labor for a manufacturer, cost of goods sold, sales commissions, and freight-out for a merchandiser, and gasoline in airline/ trucking companies
For CVP analysis, costs include what
manufacturing costs plus selling and administrative expenses.
batch-level activity
performed each time a new batch is produced
unit-level activity
performed each time a unit is produced
product-level activity
performed every time a new type of product is produced
Examples of fixed costs
property taxes, insurance, rent, supervisory salaries, and depreciation on buildings and equipment
facility-level activity
required in order to support or sustain the entire production process
Unit Contribution Margin
sales price per unit - variable cost per unit
Contribution margin is
the amount of revenue remaining after deducting variable costs. It is often stated both as a total amount and on a per unit basis.
contribution margin per unit of limited resource
unit contribution margin /limited resource consumed per unit (such as machine hours required)
Fixed costs *per unit* vary how and with what?
vary inversely with activity. As volume increases, unit cost declines, vise versa.