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.