Accy 202 Test 3
CM Ratio
CM ---------- SP
budgeting
the process of planning future business actions and expressing them as formal plans
setting prices
1. determine the product cost per unit using absorption costing 2. determine the target mark-up on product cost per unit 3. add the target mark-up to the product cost to find the target selling price
the 8 budgets that make up the master budget
1. sales budget 2. production budget 3. direct materials budget 4. direct labor budget 5. factory overhead budget 6. selling expense budget 7. general and administrative expense budget 8.cash budget
BEP Units
FC -------- CM
BEP Dollars
FC --------- CM Ratio
computing CM
SP <VC> -------- CM
CM Income Statement
Sales <VC> ------------ CM <FC> ------------ NI
benchmark
Standard, or a set of standards, used as a point of reference for evaluating performance or level of quality.
controllable cost
a cost is controllable if a manger has the power to determine or at least markedly affect the amount incurred
uncontrollable cost
a cost not within the mangers cost of influence
master budget
a formal, comprehensive plan for a company's future
budgeted income statement
a managerial accounting report showing predicted amounts of sales and expenses for the budget period. It summarizes the income effect of the budgeted activities
safety stock
a quantity of inventory that provides protection against lost sales caused by unfulfilled demands from customers or delays in shipments from suppliers
least-square regression
a statistical method for identifying cost behavior
high-low method
a way to estimate the cost equation using two points: the highest and lowest volume levels
selling expense budget
an estimate of the types and amounts of selling expenses expected during the budget period; based on the sales budget plus a fixed amount for sales managers salaries
period cost
an expense that is the period which it has incurred Ex. fixed cost
bottom-up process
asking each individual department to prepare a budget for the up-coming month or quarter. There budgets will then be sent to the budget committee who either approves them or asks for them to be reevaluated
absorption cost
assumes that products absorb all costs incurred to produce them
mixed cost
both fixed and variable cost Ex. sales man commission
variable cost
change in proportion to changes in volume in activity Ex. direct materials
variable cost
costs that change in total with changes in production level are included in product cost Ex. DM, DL, FOH
budget committee
department heads and other executives responsible for seeing that budgeted amounts are realistic and coordinated
scatter diagrams
display past cost and unit data in graphical form
estimated line of cost behavior
drawn a scatter diagram to reflect the relation between cost and unit volume
sales budget
first step in preparing a master budget, it shows the planned sales units and the expected dollars from these sales
cost volume profit (CVP) analysis
helps managers predict how changes in cost and sales levels effect profit
contribution format
highlights the impact of each cost element for income
cost volume profit chart
horizontal axis is the number of units produced and sold and the vertical axis is dollars of sales and cost. The lines in the chart depict those sales and cost at different output levels
curvilinear cost
increase as volumes increases but at a nonconstant rate Ex. direct labor cost when workers are paid by the hour
relevant range of operations
normal operating range for a business
minimum of master budget
operating budget, capital expenditures budget, and financial budget
coordination
organize the different departments within a large organization to make budgeting easier
general and administrative expense budget
plans the predicted operating expenses not included in the selling expenses or manufacturing budgets
step-wise cost
reflects a step pattern in cost Ex. like lump sum
fixed cost
remain unchanged despite variations in the volume of activity within a relevant range Ex. rent
capital expenditures budget
shows dollar amounts estimated to be spent to purchase additional plant assets the company will use to carry out its budgeted business activities
cash budget
shows expected cash inflows and outflows during the budget period
budgeted balance sheet
shows predicted amounts for the company's assets, liabilities, and equity as of the end of the budget period
factory overhead budget
shows the budgeted costs for factory overhead that will be needed to complete the estimated production for the period
direct labor budget
shows the budgeted costs for the direct labor that will be needed to satisfy the estimated production for the period
direct materials budget
shows the budgeted costs for the direct materials that will need to be purchased to satisfy the estimated production for the period
production budget
shows the number of units to be produced in a period, does not show costs
contribution margin per unit
the amount a products unit selling price exceeds its total variable cost per unit
margin of safety
the amount that sales can drop before the company incurs a loss
rolling budget
the companies who use this revise their entire set of budgets for the months or quarters remaining and add new monthly or quarterly budgets to replace the ones that have lapsed. Thus, at any point in time, monthly or quarterly budgets are available for the next 12 months or 4 quarters.
contribution margin ratio
the percent of a units selling price that exceeds total unit variable cost
break-even point
the sales level which a company neither earns a profit nor incurs a loss