Managerial ACCN

direct materials

"raw" materials integral part of finished product *if you cant see the product on the product, its not a direct material ex: tires on the car, boxes used for packing detergent produced by the company

check 2a: assume a company's total fixed costs are $30,000 and the company sells 10,000 units. Now, assume that the company has forecasted future sales of 12,000 units. compute the company's total fixed costs at the new level of activity

$30,000. total fixed costs do not change (within the relevant range)

check 1c: explain the difference in total variable costs at the two activity levels?

$72,000 - $60,000 = *$12,000* = $6 * (12,000-10,000)

direct labor variances: quantity variance

(*AH*xSR) vs (*SH*xSR) more/fewer hours

direct materials variances: quantity variance

(*AQ*xSP) vs (*SQ*xSP) more/less material

the general model for variance analysis

(1) *Actual costs*: actual quantity of input at actual price (AQxAP) (2) *TC10 budget*: actual quantity of input at standard price (AQxSP) (3) *Flexible budget*: standard quantity allowed for actual output at standard price (SQxSP) (4) *Planning budget*: standard quantity allowed for planned output at standard price (SQxSP) *Activity Variance*: (3) flexible budget - (4) planning budget *Quantity Variance*: (3) flexible budget - (2) TC10 budget *Price Variance*: (2) TC10 budget - (1) actual costs *Spending Variance*: (3) flexible budget - (1) actual costs

direct labor variances: price variance

(AHx*AR*) vs (AHx*SR*) higher/lower wage rates

direct materials variances: price variance:

(AQx*AP*) vs (AQx*SP*) higher/lower material prices

should we accept a "special order"?

*1.) identify the alternatives* -a special order is a one-time order that is not considered part of the company's normal ongoing business - do you take it or reject it? *2.) identify the criteria for choosing among them* -If I take this order, how much profit will I make? *3.) focus on the future costs and benefits that differ between the alternatives* -revenue -incremental variable costs to make the special order or modify current orders -added fixed costs - do I need to buy a new machine? *4.) ignore the sunk costs they are always irrelevant* -check your list twice for sunk costs *5.) ignore the common costs that do not differ between the alternatives* -cross out any common costs *6.) identify any opportunity costs - they are always relevant* -will you have to give up "normal orders" to fill this special order? ie do you have the capacity to make this order or not -are you picking between two special orders?

relevant costs: make or buy

*1.) identify the alternatives* -make the input or buy the input *2.) identify the criteria for choosing among them* -Is it cheaper to make it in house or buy it? *3.) focus on the future costs and benefits that differ between the alternatives* -manufacturing costs -purchasing costs *4.) ignore the sunk costs they are always irrelevant* -BE EXTRA CAREFUL HERE! IF YOU ARE CURRENTLY MANUFACTURING THE PRODUCT, YOU MAY HAVE A LOT OF SUNK FIXED COSTS *5.) ignore the common costs that do not differ between the alternatives* -cross out any common costs *6.) identify any opportunity costs - they are always relevant* -IS THERE ANYTHING ELSE YOU CAN MANUFACTURE INSTEAD OF THE INPUT?

Relevant costs: constrained resources

*1.) identify the alternatives* -what is the constrained resource? -which products need the resource? *2.) identify the criteria for choosing among them* -how much of the resource does each unit of a product need *3.) focus on the future costs and benefits that differ between the alternatives* -how much contribution margin do you gain from each unit of the constrained resource -this is weird, but the product with the highest overall contribution margin might not be the one that makes the best use of the resource *4.) ignore the sunk costs they are always irrelevant* -check your list twice for sunk costs *5.) ignore the common costs that do not differ between the alternatives* -cross out any common costs *6.) identify any opportunity costs - they are always relevant* -Is there anything else you can make with the resource that isn't on your list of alternatives?

applying MOH to WIP - t-accounts

*Mft. Overhead* actual | applied indirect materials | overhead applied to WIP indirect labor | .. other overhead | .. => *work in process (job cost sheet)* direct materials | .. direct labor | .. overhead applied | .. *if actual and applied manufacturing overhead are not equal, a year-end adjustment is required*

estimating a POHR

*POHR = estimated total manufacturing overhead cost for the coming period / estimated total activity in the allocation base for the coming period* -estimated total activity in the allocation base for the coming period should be a ~cost driver~ that causes overhead -keep in mind that this rate is an estimate that we make BEFORE we start production

allocating manufacturing overhead

*allocate* manufacturing overhead costs to all jobs: we cant directly trace them

accounting for product costs vs period costs

*product costs* -direct materials, direct labor, manufacturing overhead -inventory: assets on balance sheet -accounting: expense follows revenue; recognized in income statement when product sold *period costs* -selling and administrative -accouting: recognized in income statement in the period inccured/when benefit occurs (accrual accounting)

recording labor costs - t-accounts

*salaries and wages payable* .. | direct labor .. | indirect labor *work in process (job cost sheet)* direct materials | .. direct labor | .. *Mfg. overhead* indirect materials | .. indirect labor | ..

a job-order costing system

*trace* direct material and direct labor costs to each job as work performance

a (quick and dirty) manufacturing overhead timeline

*you want to sell cars* -you dont know the actual cost to make the cars yet! -you need to guess at how much it's going to cost to make this car! *you need to set a price for the cars* -in order to make your best guess at how much it costs to make this car, you use a predetermined overhead rate (POHR) *you make a car* -you learn how much it actually costs the car *you sell a car* -you change the estimated cost of the car to the actual cost of the car on the financial statements **remember, all you are doing is making your best guess at how much this car will cost to make. you cannot predict everything that might happen! your machine might break down! you might hav thought you'd sell 500 cars and you turn out to sell 5000.

it is difficult to set budgets because

-managers have aligned incentives and poor information -employees have misaligned incentives and better information

high low method

1.) find the high point and the low point BASED ON ACTIVITY LEVEL 2.) the variable cost per hour of maintenance is equal to the change in cost divided by the change in hours -the variable cost per hour of maintenance is equal to the change in cost divided by the change in hours 3.) find the intercept (total fixed costs) 4.) write the cost equation/cost formula 5.) plug in different activity-level's for predicting

relevant costs: drop or retain a segment

1.) identify the alternatives -drop the segment or retain it 2.) identify the criteria for choosing among them -If I drop the segment, how much contribution margin will I loose? ----watch out! sometimes dropping a segment can affect the contribution margin of other segments too -If I retain the segment, how many fixed costs will I pay? -----watch out! sometimes you can't avoid all the fixed costs, only part of them! 3.) focus on the future costs and benefits that differ between the alternatives -make your list of the costs that matter 4.) ignore the sunk costs they are always irrelevant -check your list twice for sunk costs 5.) ignore the common costs that do not differ between the alternatives -cross out any common costs 6.) identify any opportunity costs - they are always relevant -double check your list for any missing costs! remember, opportunity costs aren't always found in accounting records

six key steps to differential analysis

1.) identify the alternatives -what options are you picking between 2.) identify the criteria for choosing among them -relevant costs and relevant benefits 3.) focus on the future costs and benefits that differ between the alternatives -differential costs and differential revenues - costs and revenues that differ between the two alternatives -Incremental cost - a cost increase between the two alternatives -avoidable cost - a cost that can be eliminated by choosing between the two alternatives 4.) ignore the sunk costs they are always irrelevant 5.) ignore the common costs that do not differ between the alternatives 6.) identify any opportunity costs - they are always relevant

check 1a: assume a company's variable costs are $6 per unit sold, and the company sells 10,000 units. compute the company's Total Variable Costs.

6*10,000 = $60,000

check 1b: now, assume that the company has forecasted future sales of 12,000 units. compute the company's total variable costs

6*12,000 = $72,000

actual quantity

AQ the amount of input (direct material, direct labor, MOH) that each unit actually took to be produced

price and quantity responsibilities

CEO => production manager: oversees production, manages workers =>purchasing manger: procures materials

total manufacturing costs

DM+DL+Applied MOH

standard cost variance analysis

MATERIALS -standard quantity allowed at standard price: SQxSP -quantity variance: SP(AQ-SQ) -actual quantity at standard price: AQxSP -price variance: AQ(AP-SP) -actual quantity at actual price: AQxAP LABOR: -standard quantity allowed at standard price: SHxSR -quantity variance: SR(AH-SH) -actual quantity at standard price: AHxSR -price variance: AH(AR-SR) -actual quantity at actual price: AHxAR

applying MOH to WIP

MOH .. | applied overhead -applied based on estimate rate (POHR) x actual activity of cost driver => WIP (inventory) applied overhead | .. *MOH is a clearing account based on an estimate. it gets closed out at the end of the period, when actual costs are known*

underapplied and overapplied MOH

MOH actual: |applied overhead indirect mat. | indirect labor | other overhead | *if balance here, then UNDERAPPLIED | if balance here, then OVERAPPLIED* *at the end of there period (costs are known), actual and applied MOH WILL NOT BE EQUAL, and an adjustment is required to clear the MOH account*

manufacturing cost categories (product costs)

OCCUR IN FACTORIES!! direct materials direct labor manufacturing overhead (indirect)

selling and administrative costs (period costs)

OCCUR OUTSIDE THE FACTORY selling costs general and administrative costs

check 4: job WR53 at NW Fab, Inc. requires $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. what would be recorded as the cost fo job WR53?

POHR = $760,000/20,000 hours = $38 direct materials = $200 direct labor = 10*$15 = 150 manufacturing overhead = $38*10hrs = $380 total cost = $200 + $150 + $380 = $730

direct materials variances: standard price

SP cost of materials per unit of product -from supplier price lists, catalogs, contracts

direct materials variances: standard quantity

SQ amount of material per unit of product -form product design and engineering

standard quantity

SQ the amount of input (direct material, direct labor, MOH) that each unity needs to be produced

as with materials, only direct labor transfers to __ indirect labor transfers to ___

WIP MOH

only direct materials transfer to ___ indirect materials transfer to ___

WIP MOH

standard costs

a *standard* is a benchmark for measuring performance the *standard quantity per unit* is the amount of direct materials that should be used for each unit of the finished product, including an allowance for normal inefficiencies, such as scrap and spoilage the *standard price per unit* is the price that should be paid for each unit of direct materials and it should reflect the final delivered cost of those materials names for standards differ slightly between direct materials, direct labor and manufacturing overhead QUANTITY OF INPUT -direct materials: standard quantity per unit -direct labor: standard hours per unity -manufacturing overhead: depends on the allocation base (if the allocation base is DL Hours its standard hours per unit) PRICE OF INPUT: -direct materials: standard price per unit -direct labor: standard rate per hour -manufacturing overhead: standard rate per unit (this equals the variable portion of the POHR)

Incremental cost

a cost increase between the two alternatives

avoidable cost

a cost that can be eliminated by choosing between the two alternatives

flexible budget performance report: *revenue variance*

a favorable (unfavorable) revenue variance shows that revenue was larger (miller) than should have been expected, given the actual level of activity

flexible budget performance report: *spending variance*

a favorable (unfavorable) spending variance shows that spending was smaller (larger) than should have been expected, given the actual level of activity

dont forget, fixed costs dont change with

activity level

spending variance

actual cost flexible budget cost => the difference is a spending variance

revenue variance

actual revenue flexible budget revenue =>*revenue variance*

cash collections

all sales are on account (in credit) example of cash collection patter is: -70% of cash is collected in the month of sale -25% on credit is collected in cash in the month following sale -5% on credit uncollectible

production managers

are usually held accountable for labor variances because they can influence the: -mix of skill levels assigned to work tasks -level of employee motivation -quality of production supervision -quality of training provided to employees

common mistakes while budgeting

assuming all costs are fixed how do managers make this mistake? -managers adjust non of the costs for changes in activity assuming all costs are variable how do managers make this mistake? -managers adjust all of the costs for changes in activity

adjusting COGS for under- and over-applied MOH

at the end of the reporting period, work on jobs is complete and costs are known remember, we applied MOH to estimate our costs undersupplied and oversupplied MOH requires an adjustment to Cost of Goods Sold (an expense in the income statement): -underapplied: adjustment to increase COGS => decrease NOI -overapplied: adjustment to decrease COGS => increase NOI

whats the big deal with budgeting?

budgets are the master plans! unbelievably important part of being in business what do we use them for? -how many items should we make? -how many raw materials should we buy? -how many interns should I hire? -how much cash is coming in? -how much cash will be on hand? -should I pay with cash or credit? -Is by business going to survive?

target profit analysis

can also be calculated in unit sales (how many units do we have to sell?) or in dollars (how much sales do we have to achieve?) unit sales to target profit = (target profit + fixed expenses) / unit CM

contribution margin

cm = PxQ - VxQ amount available -first: to pay for fixed expenses -second: any amount left over provides profits for the period --if CM < FE => a loss for the period --if CM > FE => a gain for the period

flow of cost terms: finished goods

completed units of product that have not been sold to customers

management by exception

compute, report, and investigate price and quantity variances 1.) identify discrepancies from budgets or standards 2.) investigate exceptions 3.) eliminate or fix exceptions *standards represent what cost formulas should be for direct materials, direct labor, and manufacturing overhead the starting point is our flexible budget then we decompose our spending variance into price and quantity

price variances

computed by taking the difference between the actual price and the standard price and multiplying the result by the actual quantity of the input

quantity variances

computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the result by the standard price of the input

cost behavior: mixed costs

consider the example of utility (electricity) costs total mixed cost line can be expressed as: Y=a+bx Y= total mixed cost a= the total fixed cost (the vertical intercept of the line) b= the variable cost per unit of activity (the slope of the line) x= the level of activity managers typically have incomplete information we will use the high-low method to generate an estimate

cost behavior: fixed cost

constant; do not change for changes in level of activity examples: salaries, rent, insurance

reporting costs by classification

costs <=> traditional income statement <=> contribution format income statement

differential costs and differential revenues

costs and revenues that differ between the two alternatives

cost stickiness

costs are sticky if the magnitude of the increase in costs associated with an increase in volume is greater than the magnitude of the decrease in costs associated with an equivalent decrease in volume

why does cost classification matter?

costs of goods sold contains items that used to be assets, that turned into expenses when product was sold (*matching principle*) SG&A contains items that are generally expensed in incurred

cost relevance: differential costs

costs that differ between two alternative plans -also know an 'incremental costs' these costs will be the focus on ch 12: differential analysis differential revenues are revenues that differ between two alternatives can be opportunity costs too

degree of operating leverage

degree of operating leverage = cm / net operating income percentage change in net operating income = degree of operating leverage x percent change in sales *the degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits

whats the key difference between direct and indirect costs?

direct costs are both traceable and causal -you can look at it and see tires, see you worked on it indirect costs arent

cost categorizations: basic manufacturing cost types

direct labor direct materials MOH - manufacturing overhead

what is the difference between indirect and direct labor?

direct labor is a traceable product (eg assemblers) indirect labor is an indirect product cost (eg factory supervisors) and included in manufacturing overhead

product costs

direct manufacturing cost types fall under product costs

use of predetermined overhead rate (POHR)

enables us to estimate manufacturing overhead costs sooner, before actual costs are known -examples of manufacturing overhead costs: factory maintenance, factory supervisors, insurance and property taxes on the factory building, utilities various forces can cause overhead costs to fluctuate -for example, some costs fluctuate seasonally: heating, cooling and lighting we use an *allocation* base because we are unable to trace overhead costs to specific job -examples of alocaiton bases: direct labor hours, machine hours

Manufacturing overhead (indirect)

everything else associated with operating the factory ex: property taxes in factory, supervisor's salary in factory, equipment (machines, lasers), utlities

general and administrative costs

executive, organizational, clerical management of organization ex: non-factory occupancy, salaries for executives, accounting research and development, depreciation of the executives autoscosts

overview of accrual accounting

expenditure (cash flow) => asset (recognized on balance sheet) => expense (recognized on income statement)

cost categorizations: cost behavior types

fixed variable mixed

activity variances

flexible budget revenues and expenses planning budget revenues and expenses =>the difference between the budget amounts are called activity variances to prepare a flexible budget, we multiply revenue rates and variable cost rates by the *actual level of activity, q* we then compute ACTIVITY VARIANCES and determine if they are favorable (F) or unfavorable(U) Favorable when -total rev: flexible > planning -total VC: planning > flexible -total FC: -total Profit: flexible > planning

selling costs

get the order deliver the product ex: marketing, shipping to customer, salesperson's commissions

predicting cost behavior

high low method month hours of maintenance total maintenance cost

classifications for cost behavior

how will a certain cost behave in response to a change in the level of activity? -examples of predictions that managers could make: --how would an increase in sale affect costs of electricity (utilities)? --how would a decrease in production affect labor costs for factory workers? 1.) variable costs 2.) fixed costs 3.) mixed costs

why do we need flexible budgets?

in order to analyze the firm's performance, we need to create a flexible budget that shows what profit would have been under the planning budget assumptions for the actual level of activity during the month

flow of cost terms: raw materials

include any materials that go into the final product

flow of cost terms: cost of goods manufactured

includes the manufacturing costs associated with the goods that were finished during the period costs of items made, regardless of when costs were incurred - goes inbetween work in process and finished goods -direct materials -direct labor -MOH

direct labor variances: standard hours (SH) per unit

labor time to complete a unit of product -from product design and engineering

when is job-over costing used?

many different products are produced each period products are created to fill customer/client orders each order is unique and needs its own cost records types of business that use job-order costing: -custom manufacturing -distinct projects -client-focused work examples include: -Boeing (aircraft manufacturing) -Walt Disney studios (movie production)

margin of safety

margin of safety $ = total sales - breakeven sales margin of safety % = margin of safety / total sales *margin of safety represents hwo much budgeted (or actual) sales exceeds break-even analysis

budgeting process

master budget made up of many interdependent budget schedules first we forecast sales => we determine how much we need to produce in order to meet forecasted demand => we determine how many resources we need for production (direct labor, direct materials, manufacturing overhead) => we determine how many resource we need for operations (selling and administration) => determine where the cash is => we forecast total firm performance

the sales budget: our starting point

multiply budgeted unit sales by the selling price sum 3 months to obtain the total for the quarter

the health spiral

occurs when firms cut departments that look like they are losing money, but *actually have positive contribution margin* this is much more likely to happen then the departments have common fixed costs the more departments the firm cuts, the worse their profits are

cost categorizations: decision-making cost types

opportunity cost sunk costs differential costs

what about period costs?

period costs are expensed when incurred remember that some items (eg: salary costs) may contain product costs and period costs

the scattergraph method

plot the data points on a graph (total cost y "dependent variable" vs activity X "independent variable") NEEDS TO BE A LINE

cost categorizations: financial reporting cost types

product (manufacturing) period (SG&A)

direct labor variances: causes are more likely attributable to the ___, though other sources could be responsible

production manager

direct materials variances causes could be attributable to the ____ or the ____

production manager purchasing manager

CVP relationships: profit

profit = (sales-variable expenses) - fixed expenses where: -sales = selling price per unit x quantity sold (PxQ) -variable expenses= variable expenses per unit x quantity sold (VxQ) when a company has only a single product: profit = (PxQ-VxQ)-fixed expenses where -p= selling price per unit -q= quantity sold -v= variable expenses per uit -fixed expenses = total fixed expenses

overview of the production budget

provides number of units that need to be produced to meet budgeted sales needs and desired level of inventory ONLY budget that is in UNITS not $ risks of having too much inventory: goes bad, less money I have to invest in other things risks of having too little inventory: stockout, opportunity cost

purchase of raw materials - T Accounts

purchase of raw materials in T-account form

planned activity

q the amount of units we thought

actual activity

q the amount we actually sold

contribution margin ratio

quickly tells us what happens to profit if sales change CM ratio = CM/sales Profit = (CM ratio x sales) - fixed expenses

flexible budget performance report: *activity variance*

shows how a revenue or cost should have changed in response to the difference between actual and budgeted activity

use of multiple predetermined overhead rates

so far, we have been using a single predetermined overhead rate to allocate all manufacturing costs to jobs however, this is overly-simplistic -there are often multiple cost drivers if more than one cost driver can be identified, using multiple predetermined overhead rates (each based on a different cost driver) will be more accurate

flexible budgets with multiple cost drivers

some spending variances may depend on the multiple cost drivers (q) in this case, the flexible budget should incorporate all cost drivers

price and quantity vairnaces

spending variance => price variance: difference between actual price and standard price => quantity variance (efficiency variance): difference between actual quantity and standard quantity

introduction to differential analysis

strategic business decisions involve choosing between alternatives in order to pick which alternative our business should take, we will do *differential analysis* focuses on the costs and benefits that differ between the alternatives

cost relevance: sunk costs

sunk costs have already been incurred and cannot be changed now or in the future -cannot be recovered!! these costs should be ignored when making decisions -difficult to do in practice! examples: -tuition -psychological effects: "ive already invested so much time, I should wait a little longer"; "throwing in good money after bad"; ego

break-even analysis

the break-even point is the level of sales at which the company's profit is zero can be calculated in unit sales (how many units do we have to sell?) unit sales to breakeven = fixed expenses/unit CM

planning budgets and flexible budgets

the budgets that we prepare in Ch 8 are *planning budgets*: based on estimates of activity levels (sales, production) *flexible budgets* tell us what costs should have been for the actual level of activity in the period: they are still estimates!! but they will be different from our planning budget (the costs are estimates, but the activity is based on work actually performed) activity level will be referred to as *q*

format of the cash budget

the cash budget is divided into four sections: 1.) *cash receipts* section lists all cash inflows excluding cash received from financing; 2.) *cash disbursements* section consists of all cash payments excluding repayments of principal and interest; 3.) *cash excess or deficiency* section determines if the company will need to borrow money or if it will be able to repay funds previously borrowed 4.) *financing section* details the borrowings and repayments projected to take place during the budget period

check 2b: explain the difference in total fixed costs at the tow activity levels?

the company will incur costs of $30,000 to sell any number of units (within the company's relevant range). So fixed costs will not change when sales increase from 10,000 units to 12,000 units.

what is the difference between materials purchased during the accounting period and materials used in production

the difference is timing. materials used in production are materials requisitioned during the accounting period. purchases may not be used during the accounting period (but used in future periods instead)

use production budget to create direct materials budget

the direct materials budget shows all raw materials that must be purchased to provide for production and desired ending inventories

use production budget to create direct labor budget

the direct materials budget shows the cost of the direct labor hours needed for production

use manufacturing costs to create finished goods inventory budget

the finished goods inventory budget shows the manufacturing cost of unsold units

bottleneck

the machine or process that is limiting overall output it is the constraint

use production budget to create manufacturing overhead budget

the manufacturing overhead budget shows all other costs needed for production

cost relevance: opportunity costs

the potential benefit that is given up when one alternative is selected over another *not found in accounting records* example: suppose you were not attending university...

cost-volume-profit (CVP) analysis - why?

the primary purpose of CVP is to help managers understand how profits are affected by: -selling prices -sales volume -unit variable costs -total fixed costs -mix of products sold

use sales budget to create production budget

the production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory

Costs are a lot more complex than you might think

there are different types of costs. managers need different cost classifications for different reasons: -preparing external financial reports -understanding cost behavior patterns and predicting cost behavior -assigning costs to cost objectives: setting prices, measuring performance

cost-volume-profit (CVP) analysis - assumptions

to simplify the math we operate under the following assumptions: -selling price is constant. the price of product or service will not change as volume changes. -costs are linear and can be accurately divided into variable and fixed components. the variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range

closing out undersupplied and overapplied MOH

under applied and overapplied MOH get closed out to COGS *underapplied* debit cost of goods sold ....credit manufacturing overhead or *overapplied* debit manufactuing overhead ....credit cost of goods sold

flow of cost terms: work in process

units of production that are partially complete and will require further work before they are ready for sale to customers

reporting costs by classification: contribution format

used primarily by management sales <variable expenses> --------------------------- contribution margin <fixed expenses> ---------------------------- net operating income

reporting costs by classification: traditional format

used primarily for external reporting sales <cost of goods sold> -------------------------- gross margin <selling and admin expenses> ---------------------------- net operating income

cost behavior: variable costs

varies in proportion to the level of activity activity base (*cost driver*) -measure (unit) of what causes incurrence of variable costs examples: hours of production; number of units produced; number of tables served; number of seats filled

direct labor variances: standard rate (SR) per hour

wages, taxes and benefits -from employment contracts, labor laws

revenue and spending variances

we can also compare the flexible budget to our *actual results* we then compare*REVENUE AND SPENDING VARIANCES* and determine if they are favorable or unfavorable favorable when: -total rev: actual > flexible -total VC: flexible > actual -total FC: flexible > actual -total profit: actual > flexible

relevant costs: make vs buy

we compare the decision to make with the alternatives of purchasing: purchase price from outside supplier x # of units relevant costs to make the products in-house: -manufacturing costs -Ignore fixed costs that would continue even if purchasing from outside supplier! opportunity costs: *not reported on income statements -contribution margin on lost sales -rental revenues on unused space

types of questions we can answer with CVP?

what will profit be at a certain level of sales volume? what will profit be given a certain amount of fixed costs? what will profit be when contribution margin is $X per unit sold? how many units of a product do we need to sell to achieve a certain profit? -the profit we are trying to achieve has a specific name: *target profit* -when this target profit=0, we call this point "*breakeven point*": --level of sales at which profit is zero

constraint

when a limited resource of some type restricts the company's ability to satisfy demand

price and quantity variance

why separately examine price and quantity variances? (1) the purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw materials used (2) the buying and using activities occur at different times. (raw materials purchased may be held in inventory for a period of time before being used in production)

direct labor

workers that *touch* the product ex: workers in the factories that touch the car while its being made, wages of workers assembling computers, body shop, upholstery

check 3: PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period's estimated production level. in addition, the company estimates total fixed manufacturing overhead at $200,000 and variable manufacturing overhead costs of $2.75 per direct labor hour. find PearCo's POHR

y= a+bx y= $200,000 + (2.75 per direct labor-hour x 160,000 direct labor-hours) y= $200,000 + $440,000 y= $640,000 POHR = $640,000/160,000 = $4 per direct labor hour

use the following equation to estimate the total amount of manufacturing overhead

y=a+bx Y= the estimated total manufacturing overhead cost a= the estimated total fixed manufacturing overhead cost b= the estimated variable manufacturing overhead cost per unit of the allocation base x= the estimated total amount of the allocation base