ACG 2071

Break even point

is the level of sales at which profit is zero.

Understand the contribution margin and how changes in activity affect the contribution margin and net operating income

Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted.

CVP graph and be able to sketch it

A CVP graph highlights CVP relationships over wide ranges of activity. In a CVP graph (sometimes called a break-even chart), unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis. Preparing a CVP graph involves the three steps depicted in Exhibit 5-1: Draw a line parallel to the volume axis to represent total fixed expense. For Acoustic Concepts, total fixed expenses are $35,000. Choose some volume of unit sales and plot the point representing total expense (fixed and variable) at the sales volume you have selected. In Exhibit 5-1, Bob Luchinni chose a volume of 600 speakers. Total expense at that sales volume is: After the point has been plotted, draw a line through it back to the point where the fixed expense line intersects the dollars axis. Again choose some sales volume and plot the point representing total sales dollars at the activity level you have selected. In Exhibit 5-1, Bob Luchinni again chose a volume of 600 speakers. Sales at that volume total $150,000 (600 speakers × $250 per speaker). Draw a line through this point back to the origin.

Define continuous or perpetual budget p. 345

A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.

Define a self-imposed or participative budget p. 345

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement. (p. 345)

Define responsibility accounting p. 344

A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which they can exert significant control. The managers are held responsible for differences between budgeted and actual results. (p. 344)

Calculate and use the contribution margin ratio p. 194-196

CM ratio= Total Contribution margin/ Total sales or CM ratio= Unit contribution Margin/ unit selling price contribution margin ratio can be used in cost-volume-profit calculations. The CM ratio shows how the contribution margin will be affected by a change in total sales.

Understand and be able to calculate operating leverage and use operating leverage to calculate the change in net operating income p. 207

Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales. Degree of operating leverage= Contribution margin/ Net operating income Percentage in change in net operating income = Degree of operating leverage X Percentage change in sales

Adavantages of budgeting

Organizations realize many benefits from budgeting, including: Budgets communicate management's plans throughout the organization. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budgeting process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

Know external reporting p.253

Practically speaking, absorption costing is required for external reports according to U.S. generally accepted accounting principles (GAAP).3 Furthermore, International Financial Reporting Standards (IFRS) explicitly require companies to use absorption costing. Probably because of the cost and possible confusion of maintaining two separate costing systems—one for external reporting and one for internal reporting—most companies use absorption costing for their external and internal reports.

Know master budget, sales budget and cash budget (in bold) p. 346-347

The master budget consists of a number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals. sales budget, which is a detailed schedule showing the expected sales for the budget period. cash budget -A detailed plan showing how cash resources will be acquired and used over a specific time period. (p. 346)

Understand sales mix and be able to calculate break-even for a multiproduct company p. 210-211, Exh. 5-4

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales. (p. 209)

Be able to calculate target profit using the formula method in units and sales dollars

Unit sales to attain the target profit= Target profit + Fixed expenses / Unit CM Dollar sales to attain the target profit =Target profit + Fixed expenses / CM ratio

Define budget, planning, control p. 343

budget is a detailed plan for the future that is usually expressed in formal quantitative terms. Planning involves developing goals and preparing various budgets to achieve those goals. Control involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

Understand how variable costing and absorption costing differ and be able to calculate unit product costs under each method and net income using contribution format income statement with variable costing and the traditional format income statement with absorption costing p. 235, Exh. 6-5 p. 241

variable costing, only those manufacturing costs that vary with output are treated as product costs. This would usually include direct materials, direct labor, and the variable portion of manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this method. absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead. Thus, absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing costs. Because absorption costing includes all manufacturing costs in product costs, it is frequently referred to as the full cost method.

Identify traceable fixed costs and common fixed costs p. 244-245

A traceable fixed cost of a segment is a fixed cost that is incurred because of the existence of the segment—if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear. Examples of traceable fixed costs include the following: 1. The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. The maintenance cost for the building in which 2. Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing. 3. The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of The Walt Disney Corporation. A common fixed cost is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Even if a segment were entirely eliminated, there would be no change in a true common fixed cost. For example: 1. The salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors. 2. The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the store's various departments—groceries, produce, bakery, meat, and so forth. 3. The cost of the receptionist's salary at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office, but not to individual doctors.

Cost volume profit analysis

helps managers make many important decisions 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: Selling prices. Sales volume. Unit variable costs. Total fixed costs. Mix of products sold.

Be able to calculate margin of safety in dollars and as a percentage p. 204

margin of safety is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. Margin safety as in dollars = Total Budget (or actual) sales - Break even sales Margin safety as in percentage = Margin safety in dollars /Total Budget (or actual) sales

Be able to calculate break-even using the formula method in units and sales dollars p. 201-202

unit sales to break even= Fixed Expenses / Unit CM Dollar sales to break even= Fixed expenses/ CM ratio