Acctg 231 1st EditionExam # 2 Study Guide Lectures: 9 - 11Lecture 9 (2/26/15)- Contribution Margin:o The amount left after variable expenses have been deducted from sales.o Contribution Margin: Sales−Variable Expenses Unit Contribution Margin:Selling Price Per Unit−Variable Expenses Per Unito CVP Relationship in Equation Form (Profit Graph): The relationships among revenue, cost, profit, and volume can be expressed graphically by preparing a CVP graph.Profit=(Total Sales−TotalVariable Expenses)−¿ExpensesOR: Profit=(Unit CM × Number of Sales)−¿ Expenseso Contribution Margin Ratio (CM Ratio)CM Ratio=Contribution MarginSales∆ Contribution Margin=(CM Ratio×Change∈Sales )- The Variable Expense Ratio:o The variable expense ratio is the ratio of variable expenses to sales.oVariable Expense Ratio=Variable ExpenseSalesLecture 10 (3/3/15) Equation Method: Units-Profit=Unit CM ×Q− ¿ Expenses-Unit CM ×Q=Profit+¿ Expenses-Q=(Profit +¿ Expenses)Unit CMEquation Method: Sales-Profit=CM Ratio× Sales−¿Expenses-CM Ratio× Sales=Profit +¿ Expenses-Sales=(Profit+¿Expenses)CM RatioBreak-Even Sales:-¿ExpensesContribution MarginRatio(Formula Method)(Formula Method)Break-Even Units:-¿ ExpensesUnit CMComputing the Margin of Safety:- The margin of safety in dollars is the excess of budgeted (or actual) sales over the break-even volume of sales.-Margin of Safety =Total Sales−BreakEven Sales- The margin of safety can also be expressed in terms of the number of units sold.-Margin of Safety : Units=Marginof Safety∈DollarsPrice per UnitCost Structure and Profit Stability:- Cost structure refers to the relative proportion of fixed and variable costs in an organization. - There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures.o An advantage of high fixed cost structure is that income will be higher in good years compared to companies with lower proportion of fixed costs.o A disadvantage of high fixed cost structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs.Operating Leverage:- Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure at any given level of sales, of how a percentage change in sales volume will affect profits.-Degreeof Operating Leverage=Contribution MarginNet Operating IncomeLecture 11 (3/5/15) The Basic Framework of Budgeting- Budget: a detailed quantitative plan for acquiring and using financial and other resourcesover a specified forthcoming time period.o The act of preparing a budget is called budgeting.o The use of budgets to control an organization’s activities is known as budgetary control.- Planning:o Involves developing objectives and preparing various budgets to achieve those objectives.- Control:o Involves the steps taken by management to increase the likelihood that the objectives set down while planning are attained and that all parts of the organization are working together toward that goal.- Self-Imposed Budget:o A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.o Advantages: Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. Motivation is generally higher when individuals participate in setting theirown goals than when the goals are imposed from above. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.o Self-Imposed budgets should be review by higher levels of management to prevent “budgetary slack”.- The Production Budget:o The production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory.o Desired Ending Inventory: (Budgeted Sales X Desired Ending Inventory %)Format of the Cash Budget: - The cash budget is divided into four sections:o Cash receipts section lists all cash inflows excluding cash received from financingo Cash disbursements section consists of all cash payments excluding repayments of principal and interesto Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to repay funds previously borrowedo Financing section details the borrowings and repayments projected to take place during the budget