ACCTG 211 1st Edition Final Exam Study Guide Review Areas for Focus Cost Behavior Variable costs VC when stated on a per unit basis variable costs remain constant across all production levels within the relevant range fixed costs FC Fixed costs do not vary with the production level Mixed costs If within a relevant range a cost is neither fixed nor variable it is called semi variable or mixed Relevant range issues The relevant range is the range of activity e g production or sales over which these relationships are valid Graphing the concepts Total Costs FC VC FC TC VC Using the High Low Method to separate Mixed Costs into the respective Variable and Fixed Costs High Low Method First find the highest level of activity in terms of units Second find the lowest level of activity in terms of units Important you must use both the x and y from each of the highest and lowest levels of activity Third plug into the following formula to find the variable cost per unit or the slope of the trend line Variable Cost Per Unit Total Cost of Highest Level of Activity Total Cost of Lowest Level of Activity Units of Highest Level of Activity Units of Lowest Level of Activity Equations TC FC VC TC VC per Unit X of Units Total FC formula for a line y ax b y total cost x volume a slope of the line b y intercept Slope of the line variable costs per unit Y intercept total fixed costs Unit Contribution Margin Sales Variable Costs Contribution Margin Think of contribution margin CM as the amount contributed to covering fixed costs Once fixed costs are covered by CM entirety of additional CM goes straight to profit Contribution Margin Ratio CM ratio CM Sales in total per unit by percentage Contribution Margin Income Statement format Contribution Margin Income Statement Sales VC CM Fixed Costs Net Income Break even analysis Cost Volume Profit Goal project profits P for profit for different production levels V for volume assuming different cost structures C for cost In units or dollars Units Sold Units Produced Income Statement Approach Traditional Income Statement Sales COGS Gross Profit Expenses Net Income The formulas Total Fixed Costs Any Desired Profit Contribution Margin Per Unit Units Required to Cover Fixed Costs and Desired Profit Weighted Average Contribution Margin more than 1 product Aggregate sales Aggregate variable expenses Number of units sold Relevant irrelevant information Information is relevant for business decisions if it Provides information about expected future revenues or costs Differs between alternatives Information is irrelevant for business decisions if it Provides information about past revenues or costs information about a past cost is dubbed a sunk cost Does not differ between alternatives Incremental analysis Incremental Income Decrease in TC Decrease in Revenue If negative DO NOT DROP If positive DROP Typically FC is not decrease but a special deal may be made Short term decisions to deal with Special Order Pricing Target Costing Cost Plus Start with the cost to produce Add a reasonable profit margin Set the sales price remember you have market power as a price setter so the market price is likely reasonable Keep Drop i e Discontinue segments under the following scenarios Avoidable Fixed Costs Unavoidable Fixed Costs If we drop a segment there is impact on another segment Product Mix constrained resources Outsourcing we ll limit the discussion to Make or Buy Sell As Is or Process Further Joint Production Costs Capital Budgeting Capital Budgeting is related to the purchase of property plant and equipment Minimum desired rates of return why we use them and how to calculate the weighted average cost of capital Capital investment decision methods Payback period Payback period Amount Invested Expected Annual CF For Uneven cash flow Figure out atleast how many years and then figure out the portion of the final year that is needed by doing Amount remaining CF from year Accounting rate of return ARR the average annual rate of return over an asset s life ARR Average Annual Operating Income Initial Investment Average Annual Operating Income Annual project income accrual income minus any depreciation expense Net present value Time value of money Equal and unequal cash flows Comparing the Cash flows vs Income flows of potential projects