ACCT 202 Exam 2 Study OutlineChapter 8Relevant Information- Future oriented- Differs between alternatives (avoidable costs)Irrelevant Information- Do not differ between alternatives- Sunk Costs – incurred in past and cannot be changedKnow how to analyze:- Special Order Decisionso One-time order at reduced sales price; analyze impact on profito Existing fixed costs may not be relevant- Pricing Decisionso Price taker (target costing) or price setter (cost-plus pricing)?o Target Cost = Market Price – Desired Profito Cost-Plus Price = Full Cost + Desired Profit- Dropping a Product, etc.o Direct fixed expenses - avoidableo Indirect fixed expenses – unavoidable common allocated costs- Product Mixo Constraints; emphasize product with highest CM per unit of constraint - Outsourcing (Make or Buy)o Any fixed costs avoidable?o Opportunity costs – benefit foregone by selecting one alternative over another- Sell As-is or Process Furthero Joint processing costs are not relevant (sunk)o Compare additional revenue and additional costs if processed furtherQualitative Factors – may impact all of the above types of decisionsChapter 12Capital Budgeting Most methods use net cash inflows rather than operating income- Know how to convert net cash inflows to operating income and operating income to net cash inflowsPayback Period – amount of time it takes to recover initial investment; using net cash inflow; screening tool- If annuity; Payback Period = Investment / Annuity Amount - If not annuity – must sum each year until cost is recovered; portion of last year may have to be calculatedAccounting Rate of Return - only method that uses operating income instead of cash flows- ARR = Average Annual Operating Income / Investment- Compare to company’s required rate of returnTime Value of Money – tables will be provided; know how to use- Future Value of $1 table and Future Value of Annuity table FV of lump sum amount: FV = P x (FV of $1 i, n) FV of annuity: FV = P x (FVA i, n) where P is the Annuity amount- Present Value of $1 table and Present Value of Annuity table PV of future lump sum: PV = P x (PV of $1 i, n) PV of annuity: PV = P x (PVA i, n) where P is the Annuity amountInterest rate, hurdle rate, required rate of return, discount rate, minimum rate of return – used interchangeablyNet Present Value (NPV)- Determine and sum the present value of all net cash inflows and outflows- If positive or 0 - acceptable- If negative – not acceptableProfitability Index = used to rank competing investments with acceptable NPV- Profitability Index = PV of future cash flows/InvestmentInternal Rate of Return (IRR) – the actual rate of return of an investment- If an annuity: PVA factor = Investment / Annuity Amount (same formula as payback period)- Then, look up closest factor to the above amount on PVA table for the number of years given in the problemo If NPV > 0; IRR will be > Required Rate of Return (Acceptable)o If NPV = 0; IRR = Required Rate of Return (Acceptable)o If NPV < 0; IRR is less than Required Rate of Return (Unacceptable)Chapter 9Master budget and its components; order of preparation- Operating Budget – know call componentso Production BudgetUnits of sales + Desired Ending Inventory – Beginning Inventory = Units to Produceo Direct Materials Purchases Budget – calculate material purchases in units and $ o Direct labor budgeto Manufacturing overhead budget – variable and fixed sections; includes non-cash expenses that must be added back to determine cash outflowo Selling and administrative expense budget – variable and fixed sections; includes non-cash expenses that must be added back to determine cash outflowo Budgeted Income Statement - Financial Budget– know all componentso Cash Budget Determine cash collections and cash payments Determine financing needso Budgeted Balance Sheet Determine accounts receivable and payable Determine retained earningsMaster budget for merchandising companies- Cost of Goods Sold, Inventory, and Purchases Budget instead of Production, Material Purchases, Direct Labor andOverhead budgetChapter 10Decentralization – advantages and disadvantagesResponsibility Accounting Types of responsibility centers – Revenue, Cost, Profit, InvestmentSegment Margin = Contribution Margin – Direct Fixed Costs- Common allocated fixed costs should not be used to evaluate segment managerStatic vs. Flexible Budgets- Flexible budget is prepared for ACTUAL volume using the cost structure from the master budgetCalculate flexible budget for various levels of salesBudget VariancesVolume variance = Static Budget – Flexible BudgetFlexible budget variance = Flexible Budget - Actual- Determine whether variance is favorable or unfavorableChapter 11Standard Costs- Price and quantity standards for materials and laborStandard Cost VariancesThese formulas will be provided on the exam:DM Price Variance = (AP-SP)AQp DM Quantity Variance = (AQu-SQ)SP DL Rate Variance = (AR – SR) AQ DL Efficiency Variance = (AQ – SQ) SR(Remember: Price is per unit price; Quantity refers to total quantities)- Determine Favorable or Unfavorable- Analyze variances, possible