Managerial Accounting - Chapter 18 - 20

Percent Change In Operating Income (Equation)

% Change in Sales / Operating Leverage

Mixed Costs contain ___ is incurred even when facility is unused, and a ___ that ___ with usage.

1. A Fixed Portion 2. Variable Portion 3. Increases

Factors in Choosing a Cost Driver (List 3)

1. Casual relationship 2. Benefits Received 3. Reasonableness

Cost-volume-profit relationships in a service company are measured with respect to ___ and ___, rather than units of product.

1. Customers 2. Activities

Activity-Based Costing (Benefits: List 3)

1. More Detailed 2. Better Understanding of Activities 3. More Accurate

The Direct Method (5 Steps)

1. The costs for each department are determined by identifying costs that can be traced to a specific department. 2. An appropriate cost driver is determined for each support department. - ie. (1/2) The more square footage that needs to be the cleaned, the higher the Janitorial costs. 3. The usage of the support department cost drivers by each department is determined. 4. The percentage usage of support department cost drivers by the production departments is determined. - ie. (2/2) Determining the percentage usage based on square footage. 5. Support department costs are allocated to the production departments by multiplying the percentage usage of each production department by the total support department costs

The Sequential Method (5 Steps) Hint: 1-3 Are The Same as The Direct Method

1. The costs for each department are determined by identifying costs that can be traced to a specific department. 2. An appropriate cost driver is determined for each support department. - ie. (1/2) The more square footage that needs to be the cleaned, the higher the Janitorial costs. 3. The usage of the support department cost drivers by each department is determined. 4. The proportional usage of each support department's cost driver by the other departments to which its costs are to be allocated is determined. 5. Each support department's costs are allocated to other departments. - The support department's total costs are multiplied by the proportional usage of the departments to which costs are allocated.

Break-Even Point (In Dollars Equation)

Fixed Costs / Contribution Margin Ratio

Break-Even Point (In Units Equation)

Fixed Costs / Contribution Margin per Unit

Activity-Based Costing (Definition / Purpose)

Identifies activities and assigns indirect costs to those activities. * Products require activities, activities consume resources.

Margin of Safety (Definition / Purpose)

Indicates the possible decrease in sales that may occur before an operating loss results. Thus, if the margin of safety is low, even a small decline in sales revenue may result in an operating loss.

Support / Service Department (List 2 Examples)

Janitorial and Maintenance Department

Mixed Costs (Example)

Monthly Electric Utility Charge - Fixed service fee - Variable charge per kilowatt hour

Comparison of Joint Cost Allocation Methods: ___ of the four methods is more accurate than any other method.

NONE! They all allocate costs that are, by definition, inseparable. Therefore, a determination must be made as to the most appropriate method to use.

___ can be used to measure the impact of changes in sales on operating income.

Operating Leverage

Assigning Costs to Products (Equation)

Overhead Rate x Actual Activity

Net Realizable Value (Equation: 2 Types)

Processed Beyond the Split-Off Point: Final Selling Price x Quantity - Additional Processing Costs NOT Processed Beyond the Split-Off Point: Selling Price at Split-Off x Quantity

Support / Service Department (Definition / Purpose)

Provides a necessary service to produce a product, but is not directly involved in the production process.

Cost Drivers (Definition / Purpose, List 4 Examples)

Related to volume of complexity of production. 1. Machine Time 2. Machine Setups 3. Purchase Orders 4. Production Orders

Sales Mix (Definition / Purpose) - Also called ___.

Relative distribution of sales among the products sold by a company. Also called Multiproduct Break-Even.

Margin of Safety: Percentage of Current Sales (Equation)

Sales - Sales at Break-Even Point / Sales

Margin of Safety: Dollar of Sales (Equation)

Sales in Dollars - Sales in Dollars at Break-Even

Margin of Safety: Sales in Units (Equation)

Sales in Units - Sales in Units at Break-Even

Break-Even Point (Definition)

The point at which the costs of producing a product equal the revenue made from selling the product.

Stair-Step Costs (Description)

Total cost remains constant within a narrow range of activity.

Contribution Margin per Unit (Equation)

Unit Sales Price - Unit Variable Cost

Contribution Margin Ratio (Equation)

Unit Sales Price / Unit Variable Cost

Break-even formulas may be adjusted to show the sales volume needed to earn any amount of operating income. How do we do this for 1. unit sales and 2. dollar sales?

Unit Sales: Fixed Costs + TARGET INCOME / Contribution Margin per Unit Dollar Sales: Fixed Costs + TARGET INCOME / Contribution Margin Ratio

Variable Costs Per Unit ___ As Activity Increases.

Do Not Change

The Reciprocal Services Method (Hint: 1-3 Are The Same as The Direct Method)

1. The costs for each department are determined by identifying costs that can be traced to a specific department. 2. An appropriate cost driver is determined for each support department. - ie. (1/2) The more square footage that needs to be the cleaned, the higher the Janitorial costs. 3. The usage of the support department cost drivers by each department is determined. 4. The proportional usage of each support department's cost driver by the other departments to which its costs are to be allocated is determined. 5. Support department costs are allocated simultaneously among the departments by using multiple algebraic equations with variables for unknown quantities

The Weighted Average Method (Definition / Purpose)

Allocates joint costs based on weight factors for each product.

Physical Units Method (Definition / Purpose)

Allocates joint costs using a physical measure of the products at the split-off point. ie. pounds, gallons, or inches.

The Net Realizable Value Method (Definition / Purpose)

Allocates joint costs using each product's estimated net realizable value after it is fully processed.

The Market Value at Split-Off Method (Definition / Purpose)

Allocates joint costs using each product's total market value at the split-off point.

Total Variable Costs ___ When Activity Changes

Changes

Operating Leverage (Equation)

Contribution Margin / Operating Income

Fixed Costs ___ As Activity Increases.

Declines