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Week 2 Notes Ch 1 Managerial 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 prepared as needed Managerial INTERNAL users Non GAAP FUTURE ORIENTED reports Use of Managerial Accounting Managerial accounting assists these 4 functions of management 1 Planning 2 Controlling 3 Evaluating 4 Decision Making Competitive Advantage arises from 1 Product Differentiation 2 Low Cost Production How to Monitor Strategic Performance Balanced Scorecard Supply Chain Management JIT Just In Time Inventory ERP Enterprise Resource Planning Systems Ch 2 Cost Behavior Cost Estimation Cost Behavior DRIVERS The way a cost behaves or reacts to changes in Activity Levels The activity levels that drive or cause costs to change are called COST 4 Common Cost Behavior Patterns 1 Variable Costs 2 Fixed Costs 3 Step Costs 4 Mixed Costs Variable 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 Method 2 High Low Method 3 Regression Analysis y m x b where x is the level of activity Scattergraph 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 run High 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 1 000 Regression Analysis Computer generated using statistical software MOST ACCURATE Contribution 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 Exp Contribution Margin per unit Sales Price per unit Variable Cost per unit Contribution 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 only Sales Variable Exp CM Fixed Exp Operating Income GAAP Income Statement Sales COGS Gross Profit S A Exp Operating Income Week 3 Notes Ch 3 Break even point no profit or loss earn 0 income Point at which revenues equal expenses income is equal to zero there is Can be expressed as the level of sales in units or in dollars that is needed to Equation 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 SHORT CUT OR Breakeven Analysis Fixed Exp Contribution Margin per unit X 4 000 1 20 X 3 333 Solve for breakeven point IN DOLLARS using the equation method Selling price 3 00 Variable Exp 1 80 Fixed Exp 4 000 Sales 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 0 S 4 000 4 S 10 000 SHORT CUT 4 000 4 10 000 OR Fixed Expenses CM Breakeven Point In Dollars Margin of Safety and start losing money How much sales can drop before you go under the breakeven point Current Sales Breakeven Sales Margin of Safety Ex Assume sales is 5 000 per month SP 3 00 VE 1 80 FE 4 000 What is the margin of safety 5 000 3 333 1 667 units OR 15 000 10 000 5 000 Sales Margin 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 Income Net income operating income 30 operating income Net income operating income 70 Net income 70 operating income Ex Desire a Net Income of 35 000 Income tax rate 30 Calculate the target operating income 35 000 70 operating income 50 000 operating income Week 4 Ch 3 contd What if Analysis Changes in Sales Price per unit Changes in Variable Costs per unit Changes in Fixed Expenses Change is Sales Price What does this do to the Breakeven Point Sales Variable Exp Fixed Exp Operating Income 2 60x 1 80x 4 000 0 0 80x 4 000 x 4 000 0 80 Units now sold at 2 60 original price 3 00 0 40 decrease in Sales Price X 5 000 units previous breakeven point was 3 333 units This shows that a decrease in Sales Price requires a larger amount of units to be sold to break even if all other things are held constant Change in Variable Cost per unit Cost per unit went down from 1 80 to 1 40 This saves the company 0 40 per unit sold Sales Variable Exp Fixed Exp Operating Income 3 00x 1 40x 4 000 0 1 60x 4 …

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