BEC 2.2 Flashcards
(37 cards)
Contribution Approach
Not GAAP
Revenue Less: Variable Costs = Contribution Margin Less: Fixed Costs = Net Income
Variable Costs = DM + DL + Variable Mfg. O/H + Var. SG & A
Fixed Costs = Fixed Mfg. O/H + Fixed SG & A
Contribution Margin Ratio
Contribution Margin / Revenue
Absorption Approach
GAAP
- segregate costs between product and period
Revenue Less: Cost of Goods Sold =Gross Margin Less: Operating Expenses = Net Income
Contribution Approach vs. Absorption Approach
- The difference between the two is the treatment of FIXED Factory Overhead. SG &A are period costs under both and are treated the same and expensed in its entirety.
- Under Absorption approach only way FIXED factory overhead is expensed is by the per unit when the items are sold and therefore included under cost of goods sold.
- Under Contribution Approach 100% of the fixed factory overhead is expensed immediately
Profit after break-even
For every unit sold after break-even multiply by the contribution margin to get profit after break-even
Number of units to sell to break-even
Total fixed costs / Contribution margin per unit
Contribution margin ratio
Contribution margin / Sales
- if for $$ or per unit use Cm per unit and sales price per unit
Break-even point in $$
Total fixed costs / Contribution margin ratio
OR
BE units x sales price per unit
Required Sales volume for target profit
Sales = Fixed cost + Profit / Contribution Margin ratio
Tax considerations
Earnings before tax x (1 - T) = Net income after tax
Margin of Safety
Total sales - Break-even in sales = Margin of safety(in dollars)
Margin of Safety percentage
Margin of safety( in dollars) / Total sales
Controllable vs. Uncontrollable costs
Controllable costs are authorized at THIS level of management and are relevant because they can be change, uncontrollable costs are authorized by a higher level of management and cannot change and are therefore irrelevant
Special Orders
Excess capacity- accept order if Selling price exceeds relevant costs(variable costs)
Full capacity - accept order if sales price exceeds relevant costs(variable costs) + opportunity costs
*Opportunity cost per unit = CM in $$(forgo) / Size of special order
Opportunity costs
Cost of foregoing the next best alternative
- It is the Contribution Margin that would have been produced
Make vs. Buy
If the relevant costs to make including opportunity costs are less than the outside purchase price than make it
-fixed costs should be ignored here since they are uncontrollable/unavoidable
High-Low method
For flexible budgeting
- take the highest and lowest amounts
- subtract the differences
- take the dependent variable / independent variable
- then plug in VC x volume to find fixed costs
Production Budget
Sales budget drives all other budgets like production budget
Budgeted Sales
+ Desired Ending Inventory
- Begininning Inventory
= Budgeted Production
Direct Materials Used
Begininning Inventory
+ Purchases at cost
- Ending Inventory
= Direct materials used
Cost of Goods Sold
Cost of Goods Manufactured
+ Beginning finished goods inventory
- Ending finished goods inventory
= Cost of Good Sold
Cost of Goods Manufactured
Direct Materials Used(from formula if not given)
+ Direct Labor
+ Overhead Applied(fixed and variable)
= Cost of goods manufactured
Standard Quantity allowed
Actual output x the standard allowed per unit
Direct Materials Variance
Price Variance:
Actual quantity purchased x Actual Price
vs.
Actual quantity purchased x Standard Price
Usage Variance:
Actual Quantity used x Standard Price
vs.
Standard quantity allowed x Standard price
Direct Labor Variance
Rate Variance:
Actual hours x Actual price
vs.
Actual hours x Standard rate
Efficiency Variance:
Actual hours x Standard rate
vs.
Standard hours allowed x Standard rate
