Midterm Exam Ch 16,19,20

What is the interpretation of margin of safety?

$ amount by which sales exceeds the break-even point. It also represents the dollar amount by which sales can decline before an operating loss is incurred. It can provide a quick means of estimating operating income at any projected sales level.

Define fixed costs, behaviors in total and per unit amounts & examples

-Costs/expenses that do not change significantly in response to changes in an activity base. -Behaviors in Total/Per Unit Amounts: for Per Unit, fixed costs decreases as volume increases and fixed costs increase when volume decreases. For in Total, it doesn't matter if volume is increasing or decreasing, fixed costs will stay the same. —Examples: monthly depreciation, depending on business: administrative/executive salaries, property taxes, rents, etc.

Define variable costs, behaviors in total and per unit amounts & examples

-is one whose total rises or falls in approximate proportion to changes in an activity base. -behaviors in total and per unit amounts: per unit, variable costs stay the same when volume increases & the same when volume decreases. For in total, when volume increases, variable costs increase & when volume decreases, variable costs also decrease. -Examples: Mickinely's fuel expense is an example of variable costs, as it changes in approx. proportion to the number of passengers miles flown. If total passenger milers were to increase by 10%, we would expect to see a similar increase in fuel expense.

Define semi variable costs & examples

-sometime referred to as "mixed" since they contain both a fixed & variable component. - examples: the monthly fee Mickinley pays for the space the airplane uses at the airport is a fixed cost & variable portion pertains to the airlines use of the passenger terminal. Often applies when a variety of different costs are combined in one broad category.

What is the flows in/out of the various manufacturing process accounts?

1) Materials Inventory (Direct Materials): the numbers on the left side are the DM purchased & the right side of the inventory is your direct materials used —-> DM used goes to your Work In Process (WIP) Inventory (numbers on the left side include: DM, DL, MOH) the number on the right side aka what we take out is our cost of finished goods—->goes to our Finished Goods Inventory (left side will include a beginning bal + the cost of finished goods & right side will be your COGS) —-> COGS goes right to income statement.

PART 2: Finley Corporation has monthly fixed costs of $57,000. It sells two products with the following information: Product 1: Sales Price $15 and CM is $9 Product 2: Sales Price $20 and CM is $4 What total monthly sales revenue is required to earn a monthly operating income of $16,000 if the relative sales mix is 20% for Product 1 and 80% for Product 2?

1. Calculation of WACM: CM * Sales Mix Product 1: 60% * 20% = 12% Product 2: 20% x 80% = 16% Total = 28% 2. Calculation of Contribution Margin Required: Fixed Costs + Operating Income: 57,000 + 16,000 = $73,000 3.Calculation of Target Sales Revenue: CM / WACM - 73,000 / .28 = $260,714

A company for an automative product that sells for $58,000 per unit and has a CM ratio of 30%. The company's fixed expenses are $435,000 per year. The company plans to sell 30,000 units this year. 2. What is the break-even point in units and in dollar sales?

1. In units: Fixed Costs/CM per unit 435,000/17.4 (from PT 1) = 25,000 units 2.in dollar sales: fixed cost/ CM ratio 435,000/.30 = $1,450,000

PART 1: Finley Corporation has monthly fixed costs of $57,000. It sells two products with the following information: Product 1: Sales Price $15 and CM is $9 Product 2: Sales Price $20 and CM is $4 What total monthly sales revenue is required to break-even if the relative sales mix is 30% for Product 1 and 70% for Product 2? (Determine the CM ratio for each product)

1. Product 1: CM/Sales Price —> $9/$15 = 60% Product 2: $4/$20 = 20% 2. Calculation of Weighted Avg CM: CM * Sales Mix —> Product 1: 60% x 30% = 18% Product 2: 20% x 70% = 14% Total = 32% 3.Calculation of Break-Even Sales: Fixed Costs / WACM 57,000 / .32 = 178,125

A company for an automative product that sells for $58,000 per unit and has a CM ratio of 30%. The company's fixed expenses are $435,000 per year. The company plans to sell 30,000 units this year. 1. What are the variable expenses per unit?

1st, do Sales x CM Ratio = 58 (58,000) x .30 = 17,400 or $17.40. 2nd, we do Sales - Contribution: 58- 17.40 = 40.60 variable expenses per unit

What is the impact of changes in fixed costs and variable costs on CM?

A change in fixed costs does not impact the CM. A change in variable costs does; for example- If you have a product that earns $50 in revenue, has variable costs of $30, its contribution margin is $50 - $30 / $50 = 0.40 (40 percent). If you reduce the variable costs of the product, you increase the product's contribution margin.

Define economies of scale

A reduction in unit cost achieved through a higher volume of output. -example: the higher volume, the lower your fixed costs are going to be.

Mauro Products distributes a single product, a woven basket whose selling price is $16 per unit and variable expense is $13 per unit. The company's monthly fixed expense is $4,800. A. Calculate the company's break-even point in unit sales. B. Calculate the company's break-even point in dollar sales.

A. Fixed Cost/ (Selling Price - Variable Cost) —> 4,800/ (16-13) = 4800/3 = 1600 units B. Break-even point in unit sales x selling price —-> 1600 x 16 = $25,600

Classify which is a DM, DL, or MOH: A. Tubing used in manufacturing bicycles B. Wages paid by an automobile manufacturing company to an employee who test-drives every completed automobile C. Property taxes on a manufacturing facility D. Gold bullion used by a jewelry manufacturer E. Wages of assembly line workers who package frozen food F. Salary of plant superintendent G. Electricity used in factory operations H. Salary of a nurse in a factory first-aid station (on the midterm, we will have to total them from a list of cost as well)

A.DM B.DL C.MOH D.DM E. DL F. MOH G. MOH H. MOH

What are period costs? Provide a definition and examples.

Costs that are charged to expense accounts in the period that the costs are incurred. Items are classified as "expense." Or Operating Expenses. Examples: selling expenses, general & admin expenses, interest expense & income tax expense.

High Low Method: How do we calculate the slope for variable costs per unit? The intercept for total fixed costs?

First - The high‐low method divides the change in costs for the highest and lowest levels of activity by the change in units for the highest and lowest levels of activity to estimate variable costs. To calculate the slope: choosing two points so for ex: (x1,y1) & (x2,y2) & dividing the change in their cost by the change in the units of activity for the two points selected. Example: look at the highest & lowest point for per unit.. see what the total cost for those numbers are. Once you see the total cost, subtract those two numbers and then divide by the highest & lowest point per unit. The intercept: TC=FC + (VCU * # of units) ex: if TC is 320,000 & VCU is 40, and # of units is 6,000 320,000 = FC + (40 x 6,000)

How do you calculate total cost using the high-low method?

First, you need to know what your fixed costs are and then it's TC=FC + (VCU x # of units)

What's the definition of Manufacturing Overhead (MOH)? Examples? (on the midterm, we need to be able to identify them and total them from a list of manufacturing costs)

Includes all manufacturing costs OTHER THAN the costs of direct materials and direct labor. Examples: factory utilities, supervisor salaries, equipment repairs, and depreciation on production machinery.

What is the definition of value chain? Provide examples of value added vs. non-value added activities.

Is the linked set of activities and resources necessary to create and deliver the product or service to the customer. Value added activities: anything that provides value to the customer user so - those that physically create a product, deliver the product to the customer, etc.- design phase, production phase, distribution phase, customer service phase)-design new sailboats, hiring and managing production labor, displaying boats at boat shows around the country, providing customer advice and help to the sale of sailboats, etc. Non-value added activities: doesn't increase the worth of what is delivered to the customer - storing large amounts of inventory on hand, improper recording of customer transactions, etc.

When do goods flow in and out of each account? When purchased? When used? When completed? When Sold?

Materials Inventory: when purchased/used, WIP Inventory: When used/when completed & Finished Goods: When Finished/When Sold

A company for an automative product that sells for $58,000 per unit and has a CM ratio of 30%. The company's fixed expenses are $435,000 per year. The company plans to sell 30,000 units this year. 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $5.80 per unit. What is the company's new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $261,000?

New Break-even point in unit sales and in dollar sales: Unit Sales: Fixed Costs/CM Per unit: First make sure to take the old Contribution 40.60- 5.80 = 34.80, then do 58 - 34.80 = 23.20 (new CM Per unit) so now: 435,000/23.20 = 18,750 units Dollar Sales: New Break-Even Point in Unit Sales * SP per unit 18,750 x 58 = $1,087,500 Dollar Sales to attain Target Profit: Fixed Costs + Target Profit / Contribution per unit -> 435,000 + 261,000 / 23.20 x 58 = $1,740,000

The contribution margin is expressed as a ______________ of sales price. It represents the percentage of each _________________ dollar that is available to cover variable costs or to provide an operating profit. How would you interpret the percentage?

Percentage ; revenue if the CM is 60% this means that 60 cents of every sales dollar helps to cover variable costs.

What is the CM? How do we calculate contribution margin?

Sales-Variable Costs ; its simply the amount by which revenue exceeds variable costs .. To calculate: Contribution margin per unit (Unit Selling Price - Variable Cost per unit) / Unit Sales Price Example: 1. Unit Selling Price: $90 & Variable Costs per unit: $36, you would do 90-36 = 54 CM per Unit 2. 54/90 = .6 or 60% is the Contribution Margin

What do manufacturing/product costs include? What do they not include?

The costs incurred during the production of a product: examples include: -direct materials (string used for a baseball) -direct labor (assembly line workers) -MOH (electricity used to run the factory) Don't include: -non-manufacturing costs -selling & administrative costs (office supplies, depreciation) Product costs (ex: merchandise inventories) The costs of purchasing or manufacturing inventory.

What is the definition of Managerial Accounting? What characteristics make it different than Financial Accounting?

The design and use of accounting information systems inside the firm to achieve the firm's objectives. Managerial Accounting focuses internally on organization processes whereas financial accounting focuses on orgs external financial processes. focuses on internal users—executives, product managers, sales managers, and any other personnel within the organization who use accounting information to make important decisions. Financial Accounting focuses on financial statements to make business decisions.

What's the definition of Direct Materials? Examples?

The raw materials and component parts used in production whose costs are directly traceable to the products manufactured. Examples: string for a baseball, candle wax for a candle, etc.

What is the prioritization of products based on the CM %?

This metric helps managers to determine which products are most profitable and needs prioritization when allocating resources.

A company for an automative product that sells for $58,000 per unit and has a CM ratio of 30%. The company's fixed expenses are $435,000 per year. The company plans to sell 30,000 units this year. 3. What amount of unit sales and dollar sales is required to attain a target profit of $261,000 per year?

Unit sales: Fixed Costs + Target Profit / contribution per unit: 435,000 + 261,000 / 17.4 = 40,000 unit sales Dollar Sales: unit sales needed to attain target profit * selling price: 40,000 * 58 = $2,320,000

What is the calculation for margin of safety?

Unit x selling price - BEP Dollars (Break Even) Example: Unit is $30, Selling price: $60,000, BEP: $450,000 30 x 60,000 - 450,000 = $1,350,000

What's the definition of Direct Labor? Examples?

Wages and overall payroll costs of employees whose efforts are directly traceable to the products they manufacture. Examples: assembly line workers

Impact of a change in price or costs on resulting breakeven point?

from bbc.co.uk: -With increasing costs, a business would have to sell more products in order to break even or make a profit. When costs increase, businesses often have to make the choice of absorbing increased costs or passing them on to customers by increasing prices. As a result, the business will be more likely to make a loss.