**Unformatted text preview:**

Week 2 NotesCh 1Managerial Accounting- The gathering & preparing of accounting info used WITHIN a company to help efficiently & effectively achieve the organization’s goals & objectives.Users of Accounting Info: Financial vs. Managerial-Financial- EXTERNAL users, complies with GAAP, HISTORICAL, reports prepared at end of each period.Managerial- INTERNAL users, Non-GAAP, FUTURE ORIENTED, reports prepared as needed.Use of Managerial Accounting-Managerial accounting assists these 4 functions of management:1-Planning2-Controlling3-Evaluating4-Decision MakingCompetitive Advantage arises from-1-Product Differentiation2-Low-Cost ProductionHow to Monitor Strategic Performance-Balanced Scorecard, Supply Chain Management, (JIT) Just-In-Time Inventory, (ERP) Enterprise Resource Planning SystemsCh 2Cost Behavior & Cost EstimationCost Behavior-The way a cost “behaves” or reacts to changes in Activity LevelsThe activity levels that “drive” or cause costs to change are called COST DRIVERS4 Common Cost Behavior Patterns-1-Variable Costs2-Fixed Costs3-Step Costs4-Mixed CostsVariable vs. Fixed Costs-Variable Cost- as the Cost Driver activity changes, so does variable cost. Variable costs change in direct proportion to changes in Cost Driver activity. Cost remains constant on a per unit basis. (Ex. The cost of ingredients to make a combo at Wendy’s)Fixed Cost- remains constant as Cost Driver activity changes, stays at the fixed amount regardless of activity level. Per unit cost fluctuates due to activity level. (Ex. The cost of rent each month)-Remember how a cost behaves in TOTAL is the opposite of how it behaves on a per unit basis-Discretionary vs. Committed Fixed Costs-Discretionary Fixed- fixed costs that management has the ability to change in the short run. (Ex. Advertising, machine maintenance)Committed Fixed- fixed costs that the company cannot change in the short run. (Ex. Rent, utilities)Step Costs-Costs that REMAIN CONSTANT FOR A SMALL RANGE of activity but then change abruptly once outside of that range of activity. (Ex. Buying a pack of cups, if you want 0-25 cups you buy a 25 pack for $4.00, but if you want more than 25 you buy the 50 pack for $6.50)Mixed Costs- Costs that have both a Fixed component and a Variable component. (Ex. Phone Bill- you pay $50 a month PLUS an additional $0.05 for every minute you use over 500minutes)Cost Estimation Methods (Separates Mixed costs into Fixed & Variable costs)1-Scattergraph (Visual Fit) Method2-High-Low Method3-Regression Analysis*y = ( m x ) + b* where ‘x’ is the level of activityScattergraph- Find where the line crosses the y-axis, this is the estimated Fixed Costs (this is where the activity level is at 0)Find another point and guestimate its x & y coordinates (x activity level & y cost)Change in cost / Change in activity -or- (y2 – y1) divided by (x2 – x1) –or- rise/runHigh-Low Method-Find the highest and lowest activity level points. Use their costs associated with that level of activity.Find slope by plugging into the Rise/Run equation.Then solve for ‘b’ in the y=mx+b equation since you have the ‘y’ & the ‘mx’Ex. ($2,200-$1,600) / (1,600-800) = $600 / 800 = $0.75 per Then rearrange what you have$2,200 = ($0.75 * 1,600) + b b = $1,000Regression Analysis-Computer generated, using statistical software. MOST ACCURATEContribution Margin Analysis-Sales Rev - Total Exp (Variable + Fixed) = Operating Income(sales price per unit * # of units) – (variable cost per unit * # of units) – fixed expenses = Operating Income**************** IMPORTANT ****************Contribution Margin = Sales Rev - Variable ExpContribution Margin per unit = Sales Price per unit – Variable Cost per unitContribution Margin Ratio = CM / Sales Rev -or- CMper unit / Sales Price per unit*************** IMPORTANT ***************Contribution Margin vs. GAAP Income Statement-Contribution Margin Income Statement= Internal use onlySales – Variable Exp = CM – Fixed Exp = Operating IncomeGAAP Income Statement Sales – COGS = Gross Profit – S&A Exp = Operating IncomeWeek 3 NotesCh 3Break-even point:Point at which revenues equal expenses & income is equal to zero (there is no profit or loss)-Can be expressed as the level of sales in units or in dollars that is needed to earn $0 incomeEquation Method: Sales – Variable Exp – Fixed Exp = Operating Income (which is 0 for break-even point) Ex. Solve for # OF UNITS needed using the equation method. Selling price $3.00, Variable Exp $1.80, Fixed Exp $4,000= 3.00x - 1.80x – 4,000 = 0= 1.20x – 4,000 = 0= 1.20x = 4,000 x = 3,333- OR -SHORT-CUTBreakeven Analysis: Fixed Exp/Contribution Margin per unit X = 4,000/1.20 X = 3,333Solve for breakeven point IN DOLLARS using the equation method. Selling price $3.00, Variable Exp $1.80, Fixed Exp $4,000Sales – variable exp – fixed exp = operating income ($0)S = Selling Price = $3.00 = 100%Variable Exp = $1.80 = 60%Contribution Margin = $1.20 = 40%S - .6S - 4,000 = $0.4S – 4,000 = $0S = $4,000/.4S = $10,000 - OR -SHORT-CUTFixed Expenses / CM% = Breakeven Point (In Dollars)$4,000 / .4 = $10,000Margin of Safety: How much sales can drop before you go under the breakeven point and start losing money?= Current Sales – Breakeven Sales = Margin of SafetyEx. Assume sales is 5,000 per month, SP $3.00, VE $1.80, FE $4,000What is the margin of safety? = 5,000 – 3,333 = 1,667 unitsOR= $15,000 - $10,000 = $5,000 SalesMargin of Safety as a Percentage= Margin of Safety / Current Sales= $5,000 / $15,000= 33%Target Operating Income:Same as breakeven point, but now plug in the Operating Income.How many units need to be sold to earn $20,000 Operating Income?= SHORT-CUT way= (Fixed Exp + Target OI) / CM per unit= ($4,000 + $20,000) / $1.20= 20,000 units*use ratios like for breakeven point to solve for $ Dollar amount***Target Net Income= Net Income / (1 – Tax Rate) = Operating IncomeNet income = operating income – (30% * operating income)Net income = operating income * 70%Net income / 70% = operating incomeEx. Desire a Net Income of $35,000. Income tax rate = 30%Calculate the target operating income$35,000 / 70% = operating income$50,000 = operating incomeWeek 4Ch 3 contd…What-if Analysis:Changes in Sales Price per unitChanges in Variable Costs per unitChanges in Fixed ExpensesChange is Sales Price – Units now sold at $2.60, original price $3.00. - $0.40 decrease in Sales

View Full Document