Test 2 Flashcards
Variable Costs
In proportion to volume of activity (selling), variable cost/unit remains constant
Fixed Costs
Remains the same regardless of changes in volume of activity
Contribution Margin Calculation
Net sales revenue - Variable costs
Breakeven
Where operating income is zero,
Total revenues = Total costs
Operating Income
Net Sales Revenue
(Variable Costs)
(Fixed Costs)
Target Profit
Add it to fixed costs for a secondary breakeven
Margin of Safety
of Units Sold - # of Units for Breakeven
Mixed Cost
Stairstep cost or flat rate to a certain point
Breakeven Units
Fixed Costs / Contribution Margin
BE Units needed for Target Profit
(Fixed Cost + Target Profit) / Contribution Margin
Calculation Lineup
Sales Revenue
(Variable Costs)
Contribution Margin
(Fixed Costs)
Operating Income
Zero-Based Budgeting
Managers must justify all revenue and expenses (starting with nothing)
What do you start with in budgeting?
Revenue (not expenses)
Static Budget
Built on estimate for revenue
Flexible Budget
How much should have been spent based on actual revenue
What is the purpose of a budget?
Communication tool, shows co. importance and priorities (some departments get more funding than others)
Used to manage co.
Used to improve communication
Calculate Cost Variance
Cost Variance = (Actual Cost - Standard Cost) * Actual Quantity
Calculate Efficiency Variance
Efficiency Variance = (Actual Quantity - Standard Quantity Allowed) * Standard Cost
Calculate Sales Volume Variance
Sales Volume Variance = Flexible - Static
Calculate Flexible Budget Variance
Flexible Budget Variance = Actual - Flexible
What does an overspent fixed cost indicate?
The person making the static budget probably made a mistake
Which two pieces come from the flexible budget?
Cost and Efficiency Variances
Cost Center
Manager is only responsible for controlling costs (just an expense, like HR and Accounting)
Revenue Center
Manager is only responsible for generating revenue (Admissions at Corban)
Profit Center
Manager is responsible for controlling costs and profits (subsidiaries, sports teams at Corban)
Investment Center
Manager is responsible for generating profits and efficiently managing center’s invested capital (Corban University itself, more big picture)
Return on Investment (ROI)
ROI = Operating Income / Average Total Assets
Profit Margin Ratio
Profit Margin = Operating Income / Net Sales Revenue
Asset Turnover Ratio
Asset Turnover Ratio = Net Sales Revenue / Average Total Assets
Residual Income
Operating Income - (Avg total assets * Target rate of return)
What is ROI used for?
Evaluating whole company
What is RI used to determine?
How much income has been made above the target rate?
Can you control Sales Volume Variance and Flexible Budget Variances?
No (Sales Volume) & Yes (Flexible)
