Accounting 2102 Exam
Understand the definitions and applications of fixed, variable, mixed and step costs.
1. Fixed cost - a cost that does not change in total with changes in activity, but per unit cost varies indirectly with changes in activity The total cost remains constant with changes in volume. The unit cost changes inversely with changes in volume. Fixed relationship only holds over the relevant range. 2. Variable cost - any cost whose total varies in proportion to a business activity. Variable cost per unit is constant over the relevant range The total cost varies in proportionately with changes in volume. The cost per unit remains constant with changes in volume. 3. Mixed cost - a cost that has both fixed and variable components The total cost and unit cost varies with changes in volume. 4.Step cost - costs that are fixed over only a small range of activity. Once that level of activity has been exceeded, total costs increase and remain constant over another small range of activity The cost remains fixed in total over small range of volume or activity. These small ranges are smaller than the relevant range of fixed cost.
Calculate accounts receivable turnover.
Accounts receivable turnover - a measure of the liquidity of a company's accounts receivable that shows how many times, on average, a company's receivables balance is "turned over," or collected, during the year Accounts receivable turnover = Net Credit Sales/ Average Accounts Receivable balance
Calculate acid test ratio.
Acid-test ratio - a measure of liquidity that includes only highly liquid current assets in its measurement; also referred to as the quick ratio Acid-test ratio = (Cash + Cash Equivalents + Accounts Receivable)/ Current liabilities
Understand and average days to sell inventory.
Average Days to Sell Inventory - the average number of days that elapse from the receipt of inventory to its sale to customers Average Days to Sell Inventory = 365 days in a year/ Inventory turnover
Calculate average collection period and accounts receivable turnover.
Average collection period - the number of days, on average, the company takes to collect cash from a credit sale Average collection period = 365 days in a year/Accounts receivable turnover
Understand components of breakeven graph.
Breakeven graph - a graphical representation that shows the intersection of the total revenue line and the total cost line at the sales volume where the company breaks even
Calculate common-size percentages for income statement accounts and understand usefulness of these financial statements.
Common-size % on income statement → Individual revenue or expense account balance ÷ Net sales revenue
Calculate common-size percentages for both balance sheet and income statement accounts and understand usefulness of these financial statements.
Common-size analysis - a financial statement analysis technique that examines the changes in the relative size of account balances within a single financial statement; also referred to as vertical analysis Common-size % on balance sheet → Individual asset account balance/ Total assets OR Individual liability or equity account balance/ Total assets
Given points on a scattergraph, calculate variable cost per unit.
Compute the variable cost per unit (the slope of the line): Variable cost per unit = Change in total cost/Change in activity You can calculate the variable cost of a delivery as the slope of the line using any visually identified point on the line. Using the point representing 1,500 deliveries and $2,600 of total delivery cost. Variable cost per delivery = Change in total cost ÷ Change in number of deliveries m = ($2,60-$500) ÷ ($1,500 - $0) m = $2,100 ÷ $1,500 m = $1.40 per delivery Thus, total delivery cost can be estimated using the equation: ($1.40 × 1,000 deliveries) + $500 = Total delivery cost The estimated delivery cost for 1,000 deliveries would be: ($1.40×1,000 deliveries )+ $500 = $1,900
Understand and calculate contribution margin and operating income given sales, variable costs and fixed costs.
Contribution format income statement - An income statement that classifies costs by behavior. Sales revenue - Variable expenses = Contribution Margin - Fixed expenses = Operating income
Understand what happens to total and unit costs when activity level changes.
Cost behavior - the way total costs change in response to changes in the level of activity. Variable costs have two main characteristics: The total cost varies in proportion to changes in the level of activity. The cost per unit remains constant, regardless of the level of activity. Fixed cost have two main characteristics: The total cost remains fixed, regardless of changes in the level of activity. The cost per unit varies inversely with changes in the level of activity. Mixed cost: Since a mixed cost has both a fixed and a variable component, both the total cost and the unit cost will vary with changes in the level of activity. The variable component of the mixed cost increases as activity increases, so the total cost increases. The fixed component of the mixed cost causes the cost per unit to decrease with activity because those fixed costs are spread over more units. Step cost: With step costs, total cost remains constant over the step range, but unit cost decreases as usage within the step range increases.
Calculate debt to equity ratio.
Debt-to-equity ratio - total liabilities divided by total stockholders' equity; shows the amount of financing provided by creditors (debt) relative to the amount provided by owners (equity) Debt-to-equity ratio = Total liabilities/Total stockholders' equity
Supply Chain - a network of facilities that procure raw materials, transform them into intermediate goods and then into final products, and deliver the final products to customers through a distribution system. The supply chain's goal is to get the right product to the right location, in the right quantities, at the right time, and at the right cost. A simple supply chain may include as few as three trading partners—one supplier, one company, and one customer. A more complex supply chain might include hundreds of trading partners including multiple raw materials producers, manufacturers, service providers, distributors, retailers, and end users. This model includes the four major operational categories—plan, source, make, and deliver—shown in Exhibit 1.6. Notice that all trading partners within the supply chain carry out these operations within their own organization, and the operational decisions made within the organization are affected by similar decisions made by other trading partners within the supply chain.
Define the goals, steps and characteristics of the supply chain
Understand the differences between discretionary and committed fixed costs.
Discretionary fixed cost - fixed costs that can be changed over the short run For instance, the cost of an annual contract for television advertising is a fixed cost. In times of falling profits, however, a company may choose to cut such advertising costs to improve profits. Committed fixed cost - fixed costs that cannot be changed over the short run For instance, a company may have signed a 10-year lease on an office building. Until the lease period ends, nothing can be done to change the amount of rent the company pays.
Define and identify fixed vs variable costs.
Fixed cost- The total amount of a fixed cost does not change with the activity level. However, the cost per unit does change. The higher the level of activity, the lower the fixed cost per unit. Variable Costs- Any total cost that varies in proportion to a business activity is a variable cost. The activity can be any repetitive event that serves as a measure of output or usage, such as units sold, units produced, minutes talked, or miles driven. As the level of activity increases, the total cost increases by the same proportion. Conversely, as the level of activity decreases, the total cost decreases by the same proportion.
Use the high-low method to calculate both variable, fixed costs and total costs
High-low method - a cost estimation technique that uses the equation of a line (y = mx + b) and a data set's highest and lowest volume points to separate a mixed cost into its fixed and variable components To estimate total cost using the high-low method: Identify the highest and lowest levels of activity Compute the variable cost per unit (the slope of the line): Variable cost per unit = Change in total cost ÷ Change in activity Calculate the fixed cost using either the high point or the low point such that: Fixed costs = Total cost − Variable cost Complete the cost equation by showing that (Variable cost per unit × Units) + Fixed costs = Total costs
Understand the relationship between sales price, sales volume, contribution margin and operating profit.
If an organization wants to make a profit, it must generate more sales revenue than the expenses it incurs. This relation can be expressed using the following profit equation: Operating income = Sales revenue − Total variable expenses − Total fixed expenses Let's expand this profit equation based on our knowledge of cost behavior. Since variable cost per unit remains constant, we can express total variable expense as a function of the number of units sold. Likewise, we can express total sales revenue as a function of the number of units sold, resulting in the following expanded profit equation. Operating income = (Sales price per unit × # of units sold) - (Variable cost per unit × # of units sold) - Fixed expenses OR Operating income = [(Sales price per unit - Variable cost per unit) × # of units sold] - Fixed expenses
Understand impact of increases in selling price, variable cost and fixed on contribution margin, breakeven point and operating income.
In Step (1) we put everything into "constant" form—sales price per unit, variable cost per unit, and total fixed expenses. We set the number of jerseys equal to x because that is what we want to know—the number of jerseys that must be sold to break even. Step (2) shows that we could have started the calculation with the $4 contribution margin per unit, skipping Step (1). Step (3) reveals an essential relationship: At the breakeven point, the total contribution margin equals total fixed expenses. In Step (4), we solved the breakeven question: 42,000 jerseys must be sold to break even.
Understand and calculate inventory turnover and average days to sell inventory.
Inventory turnover - a measure of the number of times, on average, a company's inventory "turns over," or is sold, during the year Inventory turnover = Cost of Goods Sold (COGS )/Average Inventory balance Average Inventory balance = (Beginning Inventory balance + Ending Inventory balance) /2
Understand objectives and methodology of just-in- time inventory management.
Just-In-Time Inventory (JIT) - an inventory strategy that focuses on reducing waste and inefficiency by ordering inventory items so that they arrive just when they are needed Requires frequent deliveries of small lots of materials Requires a complementary quality program since there is no extra inventory to replace defective components
Define Managerial Accounting and understand characteristics.
Managerial Accounting - The generation and analysis of relevant information to support managers' strategic and operational decision-making activities. Characteristics: Internal vs. External Users Lack of Mandated Rules Focus on Operating Segments Focus on the Future Emphasis on Timeliness
Understand and calculate margin of safety in units and dollars.
Margin of safety - the difference between current sales and breakeven sales It represents the volume of sales that can be lost before the company begins to lose money and can be measured in units or sales dollars. Margin of safety = Current sales - Breakeven sales Let's calculate Universal's margin of safety. From Exhibit 3-1 we can calculate Universal's current unit sales: $1,039,500 ÷ $20 sales price per jersey = 51,975 jerseys sold. Margin of safety in units = 51,975 jerseys - 42,000 jerseys = 9,975 jerseys Margin of safety in sales of dollars = $1,039,500 - $840,000 = $199,500
List and understand the responsibilities and four general activities of managerial accountants.
Planning - Strategic: deciding on long-term direction of corporation; Operational: deciding how to implement long-term strategy Example: Preparing the annual operating budget that allocates resources Controlling - Monitoring day-to-day operations to ensure that processes operate as required Example: Checking a sample of products to determine whether they are in compliance with customer specifications Evaluating - Comparing actual results to planned results for the period Example: Reviewing the regional sales history for the year during the regional sales manager's annual performance appraisal Decision Making - Choosing a course of action Example: Dropping a slow-selling product from the catalog
Calculate and understand price/earnings ratio.
Price/earnings ratio - performance metric indicating what multiple of current earnings investors are willing to pay for a share of stock Price/earnings ratio = Market price per share/Earnings per share
Calculate how many units/how much revenue must be sold to reach break-even point and target operating income and net income.
Targeting Operating Income: $20x - $16x - $168,000 = $60,000 $4x - $168,000 = $60,000 $4x = $228,000 x = 57,000 jerseys Units required to meet target OI = (Total FC + Target OI) ÷ CM per unit 57,000 jerseys sold to meet target OI = ($168,000 + $60,000) ÷ $4.00 Sales dollars required to meet target OI = (Total FC + Target OI) ÷ CM ratio $1,140,000 in sales to meet target OI = ($168,000 + $60,000) ÷ 0.20 Targeting Net Income: $42,000 = 0.70 × Operating income $42,000 ÷ 0.70 = Operating income $60,000 = Operating Income Net income ÷ (1 - Tax rate) = Operating income
Understand times interest earned ratio.
Times interest earned ratio - the measurement of a company's ability to make interest payments out of current earnings Times interest earned ratio = Earnings before interest expense and income taxes/ Interest expense
Given selling price, fixed and variable costs, calculate how many units must be sold to reach a certain level of operating income and net income. (after tax income)
To find the breakeven point, set the standard profit equation equal to zero, let x equal the number of units needed to break even, and then solve for x, as shown in the following equation: Sales revenue − Variable expenses − Fixed expenses = Operating income SPx - VCx - FC = $0
Given income statement information, calculate total variable costs.
Total cost is a combination of fixed and variable costs. It can be predicted using the standard algebraic equation: mx + b = y m = the variable cost per unit x = the level of activity (such as number of units) b = total fixed cost y = total cost
Calculate selling price per unit using break-even analysis
Understand concept of breakeven point and calculate in both dollars and units. Breakeven point - the sales volume or sales revenue at which sales revenue is exactly equal to total costs, and there is no profit or loss Breakeven point in units = Total fixed expenses ÷ Contribution margin per unit 42,000 jerseys = $168,000 ÷ $4.00 Breakeven point in sales dollars = Total fixed expenses ÷ Contribution margin ratio
Understand and compute the total cost equation.
y = mx + b Total cost = (Variable cost per unit × # of units)+Total fixed cost Think about the natural gas bill you might receive for heating your apartment. To receive service, you pay a base charge of $10 per month, regardless of how much gas you use. Then you pay an additional charge of $0.06 per cubic foot for the gas you use. The $10 monthly charge is the fixed component, and the $0.06 charge per cubic foot is the variable component. So the total cost can be expressed as: Total gas cost = $10 + ($0.06 × cubic feet of gas used)
