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UGA ACCT 2102 - Exam 3 Study Guide
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What are the Benefits of Budgeting?How are Budgets Developed?ACCT 2102 1st EditionExam # 3 Study Guide Lectures: 19 - 27Here is the outline of the test: Chapter 7 2 conceptual and 5 calculationChapter 8 2 conceptual and 6 calculationChapter 9 2 conceptual and 3 calculationNo extra credit question on testBelow 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) Purchases2) Cash Collections3) 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 year5) First month of operations: beginning balance = 06) Sell/Process Further- “Split off point”: anything before split off point is irrelevant7) 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 constraint9) 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 units11) Make — Buy- “differential income”- “differential loss”12) Input ratios- constraint = DL hourso DL cost = wage rate x DL hours per unito $20/unit = $10/Dl hour*xo x = 2 DL hours/unit- constraint = DM (ex: pounds)o DM cost = price x (lbs/unit)o $20/unit = $10/lbs*xo x = 2 lbs/unitChapter 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 sales2. Increase price3. Increase sales volumeA traditional income statement reads:Sales Revenue – COGS (Product Costs) = Gross ProfitGross Profit – Selling, General, and Administrative Expenses (Period Costs) = Operating IncomeThe 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 SoldTotal Variable Cost = Unit Variable Cost x Number of Units SoldContribution Margin = Unit Contribution Margin x Number of Units SoldThe contribution margin tells us:- The amount by which sales revenue exceeds variable costs- The amount available to cover fixed cost and provide operating incomeThis 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 MarginThis 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 IncomeContribution Margin – Fixed Expenses = Operating IncomeNumber of Units x Unit Contribution Margin – Fixed Costs = Operating Income(Number of Units x Unit Contribution Margin) = Operating Income + Fixed CostsNumber of Units = Operating Income + Fixed CostsUnit Margin ContributionNumber 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 = $100Indifference point:- op y = op yChapter 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 DecisionsDo we have excess capacity available to fill this order? Excess Capacity = Full Capacity – Current ProductionWill 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 thatwill 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 DecisionsWhat 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-takero How do we gain control over pricing?o Products are not unique or heavy competitiono Target costing Revenue at market price – Desired profit = Targeted Total Costo Ex: food commodities, natural resources, generic consumer products and services- Price-settero Cost-plus pricingo Products are unique, which results in less competitiono Ex: original art/jewelry, patented perfume scents, custom-made furnitureChapter 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 dailyoperations. In addition, budgets are tools


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UGA ACCT 2102 - Exam 3 Study Guide

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