MANAGERIAL CH.1
Degree of Operating Leverage Formula
Contribution Margin / Net Operating Income
Conversion costs are
DL & MOH
manufacturing costs (also called product costs OR INVENTORIABLE costs)
DM, DL, MOH
break even FORMULA method
Fixed Expenses / Unit CM
Net Operating Income Formula
contribution margin - fixed expenses
discretionary costs
may be altered in the short term by current managerial decisions NOTE: you can remove discretionary costs first and easier than committed!!!!!!!!!!!!!!!!! - EX: If the company is facing financial challenges or experiences a downturn in its industry, management might decide to reduce spending on training programs to conserve resources. Conversely, if the company is thriving and aims to enhance employee skills to gain a competitive advantage, management could increase the budget for training and development.
balance sheet/inc. statement -
see pic
nonmanufacturing costs (also called period costs or selling and administrative)
selling & admin
opportunity costs
the potential benefit that is given up when one alternative is selected over another. EX for students: What is the opp. cost you incur by attending class?
variable expense ratio formula
variable expenses/sales
change in profit formula
CM ratio x change in sales - change in fixed expenses
CM RATIO (contribution margin) formula
CM/sales
CM ratio = 1 ???
1 MINUS the variable expense ratio
Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is .....
($1,452,000 - $958,320) ÷ $1,452,000 = 34%
unit sales to attain target profit formula
(Target Profit + Fixed Expenses) / Unit CM
Relevant Range
- levels of activity over which the company expects to operate. - total fixed costs remain constant and variable cost per unit remains constant.
schedule of COGS ( COGS MANUFACTURED)
- total manufacturing (DM+DL+OH) - ADD: beg WIP inv. - LESS: end WIP inv. - COGS MANUFACTURED ======= xxx
Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $
26,980 (284 x 95)
A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $
675000 (it is just 90000 x 7.50)
Product Costs (DM,DL,OH)
All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of RAW MATERIALS, WIP, & FINISHED GOODS!
example of cost equation
If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? Y = A + BX Y = $40 + ($0.03 X 2000) Y = $100
Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivian's Violins net operating income is ......
Net operating income = $184,000 - $85,000 = $99,000
Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is
Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000
indirect expenses
OVERHEAD costs - rent - utilities - depreciation - admin salaries
contribution margin
Sales - Variable Costs
break even EQUATION method
Sales - variable costs - fixed costs = profit
relevant range example
The relevant range is the range of activity (e.g., production or sales) over which these relationships are valid. For example, if the factory is operating at capacity, increasing production requires additional investment in fixed costs to expand the facility or to lease or build another factory.
margin of safety in dollars
Total Sales - Break Even Sales
WHAT IS COST EQUATION?
Y = A + BX
what do the letters stand for in the cost equation?
Y = total cost A = total fixed B = variable cost per unit X = number of units *needs to be in relevant range*
differential costs (incremental)
a difference in cost between any two alternatives EX: alternative one vs two; eat in towers for lunch or you go out to restaurant (10 vs 15)
Using the contribution margin ratio, the impact on net income for a change in sales dollars is
change in sales dollars × contribution margin ratio
fixed costs (2 types!)
committed and discretionary
schedule of COGS (GETTING DIRECT MATERIALS)
direct materials: - beginning raw materials inventory - ADD: purchases - raw mat. available for use - LESS: end raw mat. inv. - raw mat. used in production ==== xxx
What is manufacturing?
everything needed to make the product (materials, labor to put the product together, factory)
EX of OH
everything related to factory (rent, depreciation, insurance, taxes, utilities
Sunk costs
have already been incurred and CANNOT BE CHANGED NOW OR EVER. irrelevant when making decisions. - EX: Imagine a manufacturing company that invested in specialized machinery to increase production capacity. However, if the demand for the product decreases unexpectedly, the initial cost of purchasing the machinery becomes a sunk cost because it cannot be recovered. The company should base its decisions on current and future market conditions rather than trying to justify the investment based on past expenditures.
relevant range example
let's say a company normally sells between 1,000 and 3,000 units of product per month. Because this is their normal selling range, we can make fairly accurate assumptions about costs. If they sell outside this (for example, 6,000 units in a month), the company has to change how it predicts costs, and the cost equation originally developed will no longer provide reasonable estimates of costs
committed (fixed) cost
long-term, cannot be significantly reduced in the short term. - EX: Companies that have borrowed funds through loans or bonds must make regular interest payments and principal repayments as per the terms of the borrowing agreements. These debt servicing costs are committed expenses that the company must honor irrespective of its current financial performance. These examples illustrate how committed costs represent fixed financial obligations that a company must fulfill regardless of changes in its business operations or sales volume
Prime costs are
main costs - DM & DL
margin of safety percentage
margin of safety in dollars / total budgeted (or actual) sales in dollars
