ACCT 20200 Midterm 02 Outcomes

LO 5-4. Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.

NOI = (Sales - Variable Exp) - Fixed Exp NOI = (P · Q) - (V · Q) - Fixed Exp NOI = (CM · Q) - Fixed Exp NOI = (CM Ratio · Sales) - Fixed Exp

LO 5-3. Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.

CM Ratio = Contribution Margin / Sales NOI = (CM Ratio · Sales) - Fixed Exp

LO 8-3. Prepare a purchases budget and cash payment schedule.

COGS = Units Sold · Production Price per Unit Ending Inventory = % of COGS for Next Month Becomes Beginning Balance for Next Month Inventory Needs = COGS + Ending Inventory Total Purchases = Inventory Needs — Beg. Inventory

LO 8-8. Prepare a cash budget.

Cash Available (+) Beginning Cash Balance (+) Cash receipts _______________________________ Total Cash Available Cash Payments: from Purchases, Selling & Admin. Budget Cash Payments ONLY Cash Surplus / Deficit = Cash Available − Cash Payments Repayments = Surplus − Minimum Cash Balance Must Keep Minimum Cash Balance Subtract Value from End Balance New Borrowing = Deficit − Minimum Cash Balance To Reach Minimum Cash Balance Add Value to End Balance Long-term Debt (+) Beginning Balance (+) New Borrowing (−) Repayments _______________________________ Ending Long-term Debt

LO 8-10. Prepare a budgeted balance sheet.

Cash from Ending Cash Balance Accounts Receivable from Credit Sales less Cash Collections this Month Inventory from Desired Ending Inventory Balance Equipment and Prepaid Insurance Depreciate / Amortize Using Straight Line Method Accounts Payable from Total Purchases less Purchases this Month Commissions Payable, Income Taxes Payable, and Dividends Payable Often Incurred One Period Before Paid Retained Earnings Includes Net Income from Previous Period

LO 5-8. Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating income.

Contribution Margin / Net Operating Income Measure of how sensitive net operating income is to percentage changes in sales. Measure at any given level of sales of how a percentage change in sales volume will affect profits. Higher sensitivity given lower net income, higher fixed expenses, and higher commissions.

LO 5-1. Explain how changes in activity affect contribution margin and net operating income.

Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. CM = Sales - Variable Exp

LO 9-2. Calculate and interpret activity variances.

Differences between the flexible and planning budget amounts and actual amounts. Arises solely due to the difference in the actual level of activity and the level of activity included in the planning budget.

LO 5-7. Compute the margin of safety and explain its significance.

Excess of budgeted (or actual) sales over the break-even volume. Total Sales — Break-even Sales

LO 9-1. Prepare a planning budget and a flexible budget and understand how they differ from one another.

Planning Budget: Prepared for a single, planned level (static level) of activity. Performance evaluation is difficult when actual variance differs from the planned level of variance. Cannot compare budgets at different activity levels. -- Flexible Budget: Used to estimate what revenues and costs should have been, given the actual level of activity for the period. What would our planned budget have been if we accurately predicted activity? Planning budget at actual level of activity. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range.

LO 10-1. Compute the direct materials price and quantity variances and explain their significance.

Price Variance: How much of the variance is due to the price of the material being more (or less) than expected? Actual Quantity PURCHASED (Actual Price − Standard Price) Positive: Unfavorable, price more than expected Negative: Favorable, price less than expected -- Quantity Variance: How much of the variance is due to the quantity of the material used being more (or less) than expected? Standard Price (Actual Quantity USED − Standard Quantity Allowed) Positive: Unfavorable, price more than expected Negative: Favorable, price less than expected

LO 10-2. Compute the direct labor rate and efficiency variances and explain their significance.

Rate Variance: How much of the variance is due to the rate of the labor being more (or less) than expected? Actual Hours (Actual Rate − Standard Rate) Positive: Unfavorable, price more than expected Negative: Favorable, price less than expected -- Efficiency Variance: How much of the variance is due to the efficiency of the labor being more (or less) than expected? Standard Rate (Actual Hours − Standard Hours Allowed) Positive: Unfavorable, price more than expected Negative: Favorable, price less than expected

LO 9-3. Calculate and interpret revenue and spending variances.

Revenue Variance: Difference between actual revenue and the revenue on the flexible budget. Spending Variance: Difference between actual cost and the cost on the flexible budget.

LO 5-6. Determine the level of sales needed to achieve a desired target profit.

Solve for the sales revenue representing that which must be sold to attain a target net operating income. Q = [Target + Fixed Exp] / CM (Per Unit) $$ = [Target + Fixed Exp] / CM Ratio

LO 5-9. Compute the break-even point (target profit) for a multi-product company.

Solve for the sales volume or revenue representing that which must be sold to attain a net operating income of zero. $$ = (Fixed Exp / CM Ratio) · (% of Sales)

LO 5-5. Determine the break-even point.

Solve for the sales volume representing that which must be sold to attain a net operating income of zero. Q = Fixed Exp / CM (Per Unit) $$ = Fixed Exp / CM Ratio

LO 8-2. Prepare a sales budget, including a schedule of expected cash collections.

Total Sales = Units Sold · Selling Price per Unit Cash Receipts = % of Total Credit Sales Cash Collections from Credit Sales Vary by Month

LO 8-9. Prepare a budgeted income statement.

Total Sales Revenue Includes Sales on Credit Interest Expense as a Percentage of Long-term Debt Beginning Balance Income Taxes as a Percentage of Pre-tax Income

LO 8-7. Prepare a selling and administrative expense budget.

Variable costs given as a percentage of another balance. Fixed administrative & selling costs given directly. Variable Expenses Calculated as a Percent of Account Fixed Expenses Straight Line Depreciation of Equipment Straight Line Amortization of Insurance Cash Payments Commissions Paid Month After Incurred Insurance Prepaid One Time Depreciation is a Non-cash Payment