ACCTG 211 1st EditionFinal 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 rangefixed 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 validGraphing the concepts: Total Costs = FC + VC FC = TC - VCUsing 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 costsUnit 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 soldRelevant/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 alternativesIncremental 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 madeShort-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 CostsCapital 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
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