ACCT 2102 1st Edition Exam 3 Study Guide Lectures 19 27 Here is the outline of the test Chapter 7 2 conceptual and 5 calculation Chapter 8 2 conceptual and 6 calculation Chapter 9 2 conceptual and 3 calculation No extra credit question on test Below are conceptual and mathematical ideas which may or may not be on the test Farmer says nothing outside of the notes we did in class will be on the test therefore a book is not required unless needed for own personal reference Again nothing in Chapters 7 8 or 9 that were not in the notes will be on the test She gave hints in class about what some of the conceptual questions would be Here are the concepts that will 100 be on the test 1 Purchases 2 Cash Collections 3 Combined Cash Budget no receipts budget but know how to do a payment budget 4 Pay attention to how data is given VC unit and FC total Given per month per year 5 First month of operations beginning balance 0 6 Sell Process Further Split off point anything before split off point is irrelevant 7 Price taker market sets price company does not control price If I m a price taker I cannot use cost plus method 8 Maximized production given the operational constraint 9 Look at Problem 7 31A in book 10 Currently making 80 000 units which is 80 of my full capacity Full capacity 80 000 80 100 000 units 11 Make Buy differential income differential loss 12 Input ratios constraint DL hours o DL cost wage rate x DL hours per unit o 20 unit 10 Dl hour x o x 2 DL hours unit constraint DM ex pounds o DM cost price x lbs unit o 20 unit 10 lbs x o x 2 lbs unit Chapter 7 Lecture 19 October 7 Lecture 20 October 9 Lecture 21 October 11 and Lecture 22 October 14 You have three options to increase operating income 1 Decrease cost of sales 2 Increase price 3 Increase sales volume A traditional income statement reads Sales Revenue COGS Product Costs Gross Profit Gross Profit Selling General and Administrative Expenses Period Costs Operating Income The Contribution Margin Income Statement reads Sales Revenue Variable Expenses Contribution Margin Variable Expenses include both product DM and DL and period sales commission costs Contribution Margin Fixed Expenses Operating Income Fixed Expenses include both product factory rent factory supervisor salary factory depreciation and period sales salaries office rent office equipment depreciation costs This equation does not change the purpose of the income statement equation but rather arranges it by cost behavior rather than function Sales Revenue Sales Price x Number of Units Sold Total Variable Cost Unit Variable Cost x Number of Units Sold Contribution Margin Unit Contribution Margin x Number of Units Sold The contribution margin tells us The amount by which sales revenue exceeds variable costs The amount available to cover fixed cost and provide operating income This information is important to a manager because It allows for calculation of a break even point operating income 0 It allows us to calculate a target profit operating income 0 What is the amount available to cover fixed cost and provide operating income Contribution Margin This formula tells us how much units we need to sell to break even or make a target profit Sales Revenue Expenses Operating Income Sales Revenue Variable Costs Fixed Costs Operating Income Contribution Margin Fixed Expenses Operating Income Number of Units x Unit Contribution Margin Fixed Costs Operating Income Number of Units x Unit Contribution Margin Operating Income Fixed Costs Number of Units Operating Income Fixed Costs Unit Margin Contribution Number of Units Operating Income Fixed Costs Sales Price Unit Variable Cost When you are looking for the break even point Operating Income 0 When you are looking for a target income of 100 Operating income 100 Indifference point op y op y Chapter 8 Lecture 23 October 16 Lecture 24 October 18 and Lecture 25 October 21 Here are a few rules of thumb to keep in mind whenever you make a business decision Identify and focus on relevant information Consider qualitative factors Analyze variable costs and fixed costs separately using a contribution margin approach o Be careful about using unit cost data unless it is purely a variable cost per unit Special Order Decisions Do we have excess capacity available to fill this order Excess Capacity Full Capacity Current Production Will the reduced sales price be high enough to cover the incremental costs of filling the order the variable costs of filling the order and any additional fixed costs VC is any change in DM DL Variable MOH and variable SG A Expenses Special Units Sales Price Special Units Variable Cost FC is any change in total FC Usually increases It also includes the cost of equipment that will only be used in the special order Will the special order affect regular sales in the long run Be careful when cutting long term sales for a short term profit Pricing Decisions What is our target profit Certain profit that stockholders expect company to achieve Affected by economic conditions historical company earnings industry risk competition and new business developments How much will customers pay Depends on competition product s uniqueness effectiveness of marketing campaigns general economic conditions etc Are we a price taker or a price setter for this product Price taker o How do we gain control over pricing o Products are not unique or heavy competition o Target costing Revenue at market price Desired profit Targeted Total Cost o Ex food commodities natural resources generic consumer products and services Price setter o Cost plus pricing o Products are unique which results in less competition o Ex original art jewelry patented perfume scents custom made furniture Chapter 9 Lecture 26 October 23 and Lecture 27 October 25 Budgets are quantitative plans used by managers to plan for resource requirements and to control operations What are the Benefits of Budgeting Budgeting forces management to plan for the future rather than just focusing on daily operations In addition budgets are tools used by management to communicate the company s goals and provide a means of coordinating activities and efforts throughout the company Used properly budgets help to align the goals of management with the goals of the company this is known as goal congruence At the end of the period budgets are used as a control tool to evaluate performance The difference between the budgeted figure and the actual result is called a variance How are Budgets Developed The