Accounting213 Final Study Guide Joel Sneed Winter 2014 LIL182 Chapter 5 COST VOLUME PROFIT ANALYSIS Contribution Margin Income Statement Sales Variable Expenses Variable Cost of goods sold Variable selling and Administrative ex Commission Contribution margin Fixed expenses Joel s Kid s names are Annie Jack and Charlie Break even in units and sales BE Units Cost CM per u nit BE in sales or BE in units x Price per unit Cost CM Ratio Fixed overhead ex Salary Fixed selling and administrative Net Income Contribution Margin Ratio Total Contribution Margin Total Revenue Contribution Margin per unit Selling Price per unit Unit and sales dollars needed to achieve a target profit X units Cost Desired Profit Contribution margin per unit Sales Revenue Cost Desired profit Contribution margin ratio Before tax profit Before tax target profit 1 tax rate The Cost Volume Profit Graph Accounting213 Final Study Guide Multiple Product Analysis Steps 1 Determine CM for each product 2 Determine Sales Mix 3 Multiply sales mix x CM per product basket CM add all products 4 Fixed cost basket CM of baskets at BE 5 Unbundle the basket of baskets at BE x sales mix Units at BE 6 BE revenue sum of each products revenue BE CM ratio of bundles CM bundle Price Bundle Types of Fixed Costs Direct Fixed expenses fixed costs that can be traced to each segment or product and would be avoided if the segment did not exist Common Fixed expenses the fixed costs that are not traceable to the segments and would remain even if one of the segment s was eliminated Operating Leverage Degree of operating leverage DOL Contribution Margin Operating Income Percentage change in profit DOL x percentage change in sales Marginal Safety actual sales BE sales Chapter 10 Differential Analysis Relevant costs and benefits Relevant cost or benefit a cost or benefit that differs in total between the alternatives Any cost or benefit that does not differ between the alternatives is irrelevant and can be ignored Relevant costs are also known as differential costs and benefits Avoidable costs those costs that can be eliminated in whole or in part by choosing one alternative over another Avoidable costs are relevant costs and also known as direct fixed costs traceable fixed costs or fixed costs not yet incurred Unavoidable fixed costs 1 Common fixed costs ex Depreciation 2 Joint costs 3 General fixed costs Costs useful for decision variable costs avoidable fixed costs Accounting213 Final Study Guide If Segment Margin 0 KEEP If Segment Margin 0 DROP Contribution Margin Avoidable Segment Margin Common Cost Operating Income Make or Buy if there is a opportunity cost Make how much to make Benefit Buy Make x of units Buy offered price if Buy Make 0 then MAKE if Buy make 0 then BUY Make make price x of units benefit of make opportunity of cost new benefit Buy buy price x of units benefit of buy if benefit buy benefit of make 0 then MAKE if benefit of buy benefit of make 0 then BUY Do contribution margin income statement but for VC make sure to only take avoidable costs into account Special orders Will always be for lower price or special feature really review examples Utilization of Constrained Resources Steps 1 determine CM by product 2 Determine CM per scarce resource CM machine hours 3 Use CM per scarce resource to rank 4 produce product by rank up to their sales constraints Hrs Available Max rank 1 units at rank 1 x machine hours new Hrs Available Max rank 2 units at rank 2 x machine hours new Hrs Available Max rank 3 etc units at rank 3 etc x machine hours hrs Remain Can t do a max if the new hrs available negative Must take hrs remain and divide by machine hours to get product sales mix 5 Take sales mix for every product x each products CM CM for sales mix Each additional minute of machine time if the company has made the best use of the existing machine capacity will be the CM per minute of the last ranked product Joint Product Costs Accounting213 Final Study Guide Joint cost used to describe costs that are incurred up to the split off point These are not relevant in decisions whether joint products should be processed further because they are incurred whether or not there is further processing Split off point the point in the manufacturing process at which the joint products can be recognized as separate products Steps compare sales value at split off NOW and sales at further processing cost of further processing and see which is larger IF now further processing yes process further IF now further processing no processing further Daimler class presentation produce trucks smart cars Mercedes Benz buses limos and engines 106 mil euro company 144 billion most employment in Europe next highest in U S Truck cost between 94 000 1 million 6 0 material costs Chapter 11 Capital Budgeting Decisions Capital budgeting used to describe how managers plan significant cash outlays on projects that have long term implications such as the purchase of new equipment and the introduction of new products Decision can be used for any decision that involves an outlay now in order to obtain some further return Capital budgeting decisions long term in nature 1 Cost reduction decisions Expansion decisions 2 Equipment selection decision 3 Lease or buy decisions 4 Equipment replacement decisions 5 Types of capital budgeting decisions 1 2 Screening decisions whether a proposed project passes a preset hurdle NPV discount rate payback of yrs to recover investment Preference Decisions relate to selecting among several competing courses of action Choose the best Time Value of money discounting recognizes that a dollar today is worth more than a dollar a year from now Discounted cash flows recognize the time value of money Net Present Value NPV incorporates the time value of money and compares the present value of projects cash inflows later with the present value of its cash outflows today NPV cash inflows cash outflows Cash inflows benefits PV n x i y found from table NPV 0 then the project is acceptable so accept NPV o then the project is not acceptable so reject Accounting213 Final Study Guide NPV is the best way to make a decision b c takes into account the economic truth Payback does not account for time value of money NPV analysis emphasizes cash flows and not accounting net income only use accounting to make prediction on cash flows Must use discount table to complete these problems Present value of 1 single sum table Present value of an annuity of 1 PV of a stream of