o Serves decision makers inside the firm managers of the firm Chapters 1 5 Review Chapter 1 Accounting Information for Decision Making Managerial Accounting Making a Decision o Value Benefits Costs For for profit firms Benefits Revenue in o Value Revenue Costs Profit Opportunity Cost option o Value of what you give up by making a decision value of the best other Chapter 2 Identifying and Estimating Costs Benefits Relevant costs and benefits o A cost of benefit is relevant for a specific situation if it differs across decision options Only focus on relevant costs and benefits o Costs that have been incurred in the past o Our decisions today will not change them they are no longer relevant Sunk Costs IGNORE THEM Short Term decisions Long Term Decisions Fixed Cost o Capacity resources are fixed and non controllable o Capacity resources are controllable and can be adjusted o A cost that does not change as the volume of the activity changes o Example Rent depreciation salaries o A cost that is proportional to the volume of the activity o Example Cost of components and materials used in production o Cost that contains both fixed and variable components o Example Electric bills manager s total compensation salary bonus Variable Cost Mixed Cost Total Costs o Total costs are usually mixed costs o TC FC Unit VC Volume o TC Total Costs o FC Fixed Costs o Unit VC Variable Costs Per Unit o Volume of units produced or sold depending on context Chapter 3 Cost Flows and Cost Terminology GAAP o Distinguishes between product costs and period costs requires matching of product costs to revenue Product Costs Period Costs o Costs related getting products or services ready for sale o Example Materials and labor used in production o All costs that aren t product costs o Example Sales office rent advertising Cost Treatment in GAAP o Product costs vs Period Costs o Matching of product costs to sales revenue Cost Flows in merchandising firms o Inventory equation Cost of Goods Sold COGS during the period Cost of Beginning Inventory Cost of goods purchased during the period Cost of Ending Inventory Cost Flows in Manufacturing Firms o Cost terminology o Inventory equations materials WIP FG o Cost of Materials Used Cost of Beginning Inventory of Materials Purchases of Materials Cost of Ending Inventory of materials o Cost of Goods Manufactured COGM Cost of Beginning WIP work in progress Inventory Cost of Materials Used Cost of Direct Labor Manufacturing Overhead Cost of Ending WIP Inventory o Cost Of Goods Sold COGS Cost of Beginning FG finished goods Inventory Cost of Goods Manufactured COGM Cost of Ending FG Inventory o Income Statement Gross Margin Revenue Cost of Goods Sold COGS Profit Gross Margin SG A Costs Cost Terms in Manufacturing Firms o Indirect costs Manufacturing overhead Fixed Overhead Variable Overhead o Direct Costs Direct Materials Direct Labor Variable Costs o Selling General and Administrative Costs SG A Costs Fixed SG A and Variable SG A Merchandising Firms o Buy goods from suppliers and resell them to customers Walmart o Maintain inventory of goods on shelves in the store or in warehouse Chapter 4 Contribution Margin Statement Techniques For Estimating Fixed Variable Costs Traditional Income Statement o Income Statement does not separate variable costs from fixed costs o We CANNOT use it to make decisions about volume because we cant tell how much the costs will change with changes in sales volume Contribution Margin Statement o Separates fixed costs from variable costs o Good for evaluating short term decisions o Contribution Margin CM Revenue Variable Costs o Unit Contribution Margin Contribution Margin per unit or Price Unit Variable Cost o Profit Contribution Margin Fixed Costs Estimating Cost Structure o The relation between Total Costs and Volume of units is TC FC Unit VC Volume 3 Methods to Estimate FC and Unit VC Account Classification Use DETAILED data on individual cost accounts for last period o Step 1 Classify each account as fixed or variable o Step 2 Estimate FC and Unit VC FC total cost in accounts classified as fixed VC total cost in accounts classified as variable then unit VC VC Volume High Low Method Only need data on total costs activity volume for several periods in the past Regression Analysis Statistical method to find a line that best fits all available observations Which Method is Best o Account Classification is best when historical patterns may not continue or new operations new products in which case we don t have historical data o High Low Method and Regression work well when we expect historical patterns to continue o All 3 methods estimates are only valid in the relevant range normal range of operation where the relation between activity volume and costs is stable Chapter 5 Cost Volume Profit Analysis Cost Volume Profit CVP Relation o CVP summarizes the relation between profit and sales volume of units or sales revenue in in a single equation o CVP is used for evaluating short term decisions related to sales volume or sales revenue Short term Remain Constant CVP Relation Version 1 o We can rewrite profit in several equivalent ways Profit Revenue Total costs Revenue Variable Costs Fixed Costs Contribution Margin Fixed Costs Unit Contribution Margin Sales Volume Fixed Costs Cost Volume Profit Relation Main Version Profit Unit CM Volume Fixed Cost where unit CM Contribution Margin Per Unit Price Unit VC Volume Sales Volume of units sold Cost Volume Profit Relation Version 2 o Another way to rewrite the CVP relation Profit as a function of sales revenue in not volume in units via the Contribution Margin Ratio Contribution Margin Ratio CMR Contribution Margin Sales Revenue Unit Contribution Margin Price CMR is the contribution per of sales revenue whereas unit CM is the contribution per unit sold o Cost Volume Profit Relation Version 2 Profit CMR Revenue FC where CMR Contribution Margin Ratio Contribution per of sales Revenue Sales Revenue in FC Fixed Costs What is Cost Volume Profit Model good for o Profit Planning Short term Predicting profit at different sales levels Breakeven analysis Target profit analysis Evaluating Pricing decisions o Evaluating Operating Risk Short term Margin of Safety Operating Leverage Breakeven Volume o Sales volume at which profit 0 you break even o Profit Unit CM Volume FC 0 o Breakeven volume FC Unit CM Breakeven Revenue o Sales Revenue at which profit 0 o Breakeven Revenue Breakeven Volume Price Breakeven Revenue Version 2 o