Module 1 Flashcards
Plan
set goals and objectives; determine specific roadmap for achieving those goals using budgets
Control
monitoring the company’s day-to-day operations using various managerial accounting reports
Evaluate
compare actual results of operations against the plan using variance analysis and other performance evaluation tools
Make Decisions
managers must choose between available alternatives in every step using cost-benefit analysis
Primary users (Managerial and Financial)
M: Internal management
F: External users, primarily stockholders and creditors
Purpose (Managerial and Financial)
M: plan, control, evaluate operations
F: help make investing and lending decisions
Accounting Product (Managerial and Financial)
M: on demand reports
F: annual or quarterly GAAP financial statements
Basis of info (Managerial and Financial)
M: relevant data with future focus
F: reliable data based on historical transactions
Business unit (Managerial and Financial)
M: segments
F: consolidated
Audited by (Managerial and Financial)
M: internal auditors
F: independent, external CPAs
Requirements by (Managerial and Financial)
M: N/A
F: Securities and exchange commission (SEC)
Affects employee behavior (Managerial and Financial)
M: carefully consider when designing incentives
F: not a concern
Board of directors
Elected by shareholders to oversee the company
Chief Executive Officer (CEO)
hired by BOD to manage the company on daily basis
VP of Various Operations
research and development, sales, marketing, purchasing, production, etc
Treasurer
raise capital, invest and manage $
Controller
general financial and managerial accountant
Audit committee
oversee annual external audit
internal audit
internal controls and risk management
Where do management accountants fit in?
Everywhere. Serve on cross-financialteams reporting to various VPs providing data and financial perspective
Contribution Income Statement
Sales Revenue (Variable Expenses) Contribution Margin (Fixed Expenses) Operating Income **Based on cost behavior (Used to see how different volumes will impact business)
Variable cost
-total costs change in direct proportion to changes in activity level
TC = VC * x
For variable cost: as activity level rises, unit costs ….
don’t change; VC/unit is constant
For variable cost: as activity level rises, total costs ….
rises
Fixed cost
total costs do not change despite changes in activity level (volume)
For fixed cost: as activity level rises, unit costs ….
FC/unit decreases
For fixed cost: as activity level rises, total costs ….
no change to TC; TC is constant
Mixed cost
costs that contain both a variable and a fixed component
For mixed cost: as activity level rises, unit costs ….
Unit costs decrease because of fixed component
For mixed cost: as activity level rises, total costs ….
TC rises because of variable component
Relevant range
normal operations. If we move outside of relevant range, total FC and VC/unit could change
Step costs
fixed for a small range of volume then jumps to a new level with a moderate change in volume; ex. baristas: 20 cups/hr cap, if you make more you need more baristas
Curvilinear Costs
does not follow a neat pattern; Approximate linear line
A traditions income statement is based on
cost function
Costs of goods sold expenses are …
costs that can be directly traced to the product or service sold
Operating expenses are
everything else we spend to run the business
A contribution income statement is based on
cost behavior
Account analysis
classify every account on the trial balance as variable, fixed, or mixed
Scattergraphs
used to help managers visualize the relationship between cost and volume
Cost equation
TC= (VC * x) + FC
High-Low Method Steps
- identify the data points with the highest and lowest volume of activity
- Find the slope of the line. This will be our variable cost per unit
- Find the vertical intercept of the line. This will be our fixed cost. Use the cost equation and 1 data point.
Regression Analysis
Use all data points to estimate the cost equation
TC = (X Variable 1 * Volume) + Intercept
Intercept coefficient
Fixed costs
X Variable 1
variable cost/unit (VC) or slope of the line
R square
goodness of fit; how well does the line/cost equation fit the data points
> .8 = strong relationship
.5 - .8 = use with caution
< .5 = weak relationship
Which method is most accurate for cost equation?
Regression analysis
Which income statement format do managers use to predict costs?
Contribution Margin Income Statement
Profit Equation
P = (SP * x) - (VC * x) - FC
Break even point
How much do we need to sell just to cover all of our costs?
Steps to Break-even (for one product)
- Set the profit equation equal to zero
- Calculate the contribution margin per unit
- At the break-even point, total contribution margin = total cost
- Solve for x to find the break-even point in units
Contribution margin meaning
sales revenue left, after covering variable costs, to cover fixed costs plus desired operating profit
Contribution margin ratio meaning
% of every sales dollar that goes towards fixed costs + operating profits
How to calculate CM%
(Unit CM $) / (Unit Sales Price)
or
(SP - VC) / (SP)
How to use the profit equation to calculate targeted profit or income?
change P from 0 to desired profit (set equation = desired profit instead of 0)
How to use CM $ or CM % to calculate targeted profit or income?
add desired profit to the numerator (Fixed Cost)
$ amount to cover) / (Unit CM $
Margin of Safety
excess of actual sales over breakeven sales; Cushion or drop in sales the company can sustain before losing money; Used to evaluate risk
Margin of Safety in Units =
Expected or Actual Units Sold - Break-even Units
Margin of Safety as a percent calculation
(Margin of safety in units) / (expected or actual units sold)
Steps to calculate multi product breakeven point and activity required to meet a target income
- Calculate CM per unit
(CM = SP * x - VC * x) - Determine the sales mix
(Sales mix = Sales of 1 product / total sales) - Calculate the WACM
(WACM = sum of product’s unit CM$ * that product’s sales mix) - Use the WACM to determine the breakeven point in units (ROUND UP)
(BE point = $ amount to cover / WACM) - Use the sales mix to determine exactly which products we need to produce (round normally)
(Individual BE point = BE point * that product’s sales mix)
What factors influence the price a customer is willing to pay for a product or service?
Quality, utility, supply, price, convenience, organic
What factors influence the price a company wants to charge for a product or service?
input costs, profit, other operating expenses
Cost-Plus pricing
starts with the cost of the product or service and adds a markup to cover the company’s operating costs and contribute to its profit
Calculate Markup %
(SP - Cost) / (Cost)
Target Costing
Starts with the price customers are willing to pay and calculates the maximum cost the company can incur to deliver the product or service and earn the desired markup
Calculate Gross Margin %
(sales price - cost) / sales price
