Accy 202 Test 3

CM Ratio

CM ---------- SP

budgeting

the process of planning future business actions and expressing them as formal plans

setting prices

1. determine the product cost per unit using absorption costing 2. determine the target mark-up on product cost per unit 3. add the target mark-up to the product cost to find the target selling price

the 8 budgets that make up the master budget

1. sales budget 2. production budget 3. direct materials budget 4. direct labor budget 5. factory overhead budget 6. selling expense budget 7. general and administrative expense budget 8.cash budget

BEP Units

FC -------- CM

BEP Dollars

FC --------- CM Ratio

computing CM

SP <VC> -------- CM

CM Income Statement

Sales <VC> ------------ CM <FC> ------------ NI

benchmark

Standard, or a set of standards, used as a point of reference for evaluating performance or level of quality.

controllable cost

a cost is controllable if a manger has the power to determine or at least markedly affect the amount incurred

uncontrollable cost

a cost not within the mangers cost of influence

master budget

a formal, comprehensive plan for a company's future

budgeted income statement

a managerial accounting report showing predicted amounts of sales and expenses for the budget period. It summarizes the income effect of the budgeted activities

safety stock

a quantity of inventory that provides protection against lost sales caused by unfulfilled demands from customers or delays in shipments from suppliers

least-square regression

a statistical method for identifying cost behavior

high-low method

a way to estimate the cost equation using two points: the highest and lowest volume levels

selling expense budget

an estimate of the types and amounts of selling expenses expected during the budget period; based on the sales budget plus a fixed amount for sales managers salaries

period cost

an expense that is the period which it has incurred Ex. fixed cost

bottom-up process

asking each individual department to prepare a budget for the up-coming month or quarter. There budgets will then be sent to the budget committee who either approves them or asks for them to be reevaluated

absorption cost

assumes that products absorb all costs incurred to produce them

mixed cost

both fixed and variable cost Ex. sales man commission

variable cost

change in proportion to changes in volume in activity Ex. direct materials

variable cost

costs that change in total with changes in production level are included in product cost Ex. DM, DL, FOH

budget committee

department heads and other executives responsible for seeing that budgeted amounts are realistic and coordinated

scatter diagrams

display past cost and unit data in graphical form

estimated line of cost behavior

drawn a scatter diagram to reflect the relation between cost and unit volume

sales budget

first step in preparing a master budget, it shows the planned sales units and the expected dollars from these sales

cost volume profit (CVP) analysis

helps managers predict how changes in cost and sales levels effect profit

contribution format

highlights the impact of each cost element for income

cost volume profit chart

horizontal axis is the number of units produced and sold and the vertical axis is dollars of sales and cost. The lines in the chart depict those sales and cost at different output levels

curvilinear cost

increase as volumes increases but at a nonconstant rate Ex. direct labor cost when workers are paid by the hour

relevant range of operations

normal operating range for a business

minimum of master budget

operating budget, capital expenditures budget, and financial budget

coordination

organize the different departments within a large organization to make budgeting easier

general and administrative expense budget

plans the predicted operating expenses not included in the selling expenses or manufacturing budgets

step-wise cost

reflects a step pattern in cost Ex. like lump sum

fixed cost

remain unchanged despite variations in the volume of activity within a relevant range Ex. rent

capital expenditures budget

shows dollar amounts estimated to be spent to purchase additional plant assets the company will use to carry out its budgeted business activities

cash budget

shows expected cash inflows and outflows during the budget period

budgeted balance sheet

shows predicted amounts for the company's assets, liabilities, and equity as of the end of the budget period

factory overhead budget

shows the budgeted costs for factory overhead that will be needed to complete the estimated production for the period

direct labor budget

shows the budgeted costs for the direct labor that will be needed to satisfy the estimated production for the period

direct materials budget

shows the budgeted costs for the direct materials that will need to be purchased to satisfy the estimated production for the period

production budget

shows the number of units to be produced in a period, does not show costs

contribution margin per unit

the amount a products unit selling price exceeds its total variable cost per unit

margin of safety

the amount that sales can drop before the company incurs a loss

rolling budget

the companies who use this revise their entire set of budgets for the months or quarters remaining and add new monthly or quarterly budgets to replace the ones that have lapsed. Thus, at any point in time, monthly or quarterly budgets are available for the next 12 months or 4 quarters.

contribution margin ratio

the percent of a units selling price that exceeds total unit variable cost

break-even point

the sales level which a company neither earns a profit nor incurs a loss