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ACG 2071 - Exam 3 Chapter 1 :: 1 conceptual question Financial Accounting vs External Users Complies with GAAP Company-Wide Reporting Historical Reports prepared at the end of the Accounting Period Managerial Accounting Internal Users Non-GAAP Divisional/Departmental Recording Future Oriented Reports Prepared as Needed Chapter 2 :: 3 questions, 1 conceptual Variable costs: a cost that changes in total as the cost driver activity changes Even though the ingredient price stays consistent, its total cost changes -- # cookies x cost/ingredient = Total costs 100 x $0.50 = $50 500 x $0.50 = $250 Fixed costs: a cost that remains constant in total as the cost driver activity changes Insurance will remain a constant price, but when you allocate it to how many cookies are sold, it varies – Rent / # of cookies = Rent cost per cookie $1,500 / 5,000 = $0.30 $1,500 / 1,500 = $1.00 $1,500 / 3,000 = $0.50 Step costs: costs that remain constant for a small range of activity but change abruptly once beyond that range A box of 500 bowls at $50 per box: If you need 5,200 bowls so you need 10.4 boxes since you can’t purchase a fraction of the box, you need to round up to suffice your needed amount of bowls so you order 11 boxes therefore this is a step cost Mixed costs: costs that have both a fixed component and a variable component A phone bill: you are required to pay a flat fee every month just to have the company’s services, then you pay additional charges for every minute of long-distance calling you make – the bill will be a combination of your flat (fixed) portion and your additional (variable) charges High-low method: a cost estimation technique that uses the equation of a line (y = mx + b) and a data set’s highest and lowest volume points to separate a mixed cost into its fixed and variable components Select the two data points based on the highest and lowest activity ∆ Cost = $2,200 - $1,600 = $600 = $0.70 ∆ Activity = 1,600 – 800 = 800 The total costs varies Total cost remains fixed ∆ = Difference or Change in the Cost and ActivityIncome statement formats: GAAP Format vs Contribution Margin Format Sales Sales - COGS DM, DL, V.OH, F.OH - VC DM, DL, V.OH, V.S+A GM CM - S + A Fixed & Variable - FC F.OH, F.S+A Operating Income Operating Income Chapter 3 :: 4 questions, 1 conceptual Breakeven analysis: calculating the point at which revenues are equal to expenses so income is equal to zero There are two different ways to calculate breakeven point: The Equation Method: sales – variable exp – fixed exp = operating income $3.00x - $1.80x - $4,000 = $0 $1.20x - $4,000 = $0 X = $4,000 / $1.20 X = 3,333 (number of cookies needed to breakeven) Contribution Margin: Fixed Expenses = Breakeven Point CM per unit (in units) $4,000 / $1.20 = 3,333 (number of cookies needed to breakeven) Margin of safety: the amount of sales that can be drop before losing money overall (The difference between current sales and breakeven sales) Current Sales $15,000 - Breakeven Sales - $10,000 Margin of Safety $5,000 Target operating income: finding the number of units that must be sold to earn a specific operating income Calculate by using The Equation Method or The Contribution Margin Technique $3.00x - $1.80x - $4,000 = $20,000 $1.20x - $4,000 = $20,000 $1.20x = $20,000 + $4,000 X = $24,000 / $1.20 X = 20,000 (number of cookies needed to have desired op. inc.) What-if analysis: Changes in Sale Price per Unit: finding a new breakeven point using the equation method, substituting for the needed sell price Sales – Variable Expenses – Fixed Expenses = Operating Income $2.60x - $1.80x - $4,000 = $0 $0.80x - $4,000 = $0 $0.80x = $4,000 x = $4,000 / $0.80 x = 5,000 cookies Op. Income is equal to 0 at breakeven point Easiest way: it’s basically a shortcut in the Equation Method Using $20,000 as the target operating income DM = Direct Materials DL = Direct Labor V.OH = Variable Overhead V.S+A = Variable Selling + Administration Expenses F.OH = Fixed Overhead F.S+A = Fixed Selling + Administration Expenses New total amount of products needing to be sold to breakeven New price needed to sell productChanges in Variable Costs per Unit: finding how the breakeven point would be affected if there is a change in the variable costs per unit Sales – Variable Expenses – Fixed Expenses = Operating Income $3.00x - $1.40x - $4,000 = $0 $1.60x - $4,000 = $0 $1.60x = $4,000 x = $4,000 / $1.60 x = 2,500 cookies Changes in Fixed Expenses: finding how the breakeven point would be affected if there is a change in the fixed costs Sales – Variable Expenses – Fixed Expenses = Operating Income $3.00x - $1.80x - $4,500 = $0 $1.20x - $5,000 = $0 $1.20x = $5,000 x = $4,500 / $1.20 x = 3,750 cookies Multiproduct CVP analysis: formula for whenever a ratio is involved with your data Say you sell three times more of one product for every one sold of the other product (3:1 ratio) (sales – variable expenses) + (sales – variable expenses) – fixed expenses = operating income CM + CM – fixed expenses = operating income For Cookies For Milk ($1.20 * 3x) + ($1.40 * x) - $4,000 = $0 $3.60x + $1.40x - $4,000 = $0 $5x - $4,000 = $0 $5x = $4,000 x = 800 milk cartons 3x = 2,400 cookies Chapter 4 :: 2 questions, 1 conceptual Cost flows through inventory accounts: (conceptual) Raw materials: materials purchased for production that have not yet been used, Work in Process: products that have been started but not yet finished, and Finished Goods: products that have been completed but not yet sold Each acct has a basis of Beginning + Costs added = Costs removed = Ending Balance during the period during the period balance Raw Materials Inventory Work In Process Inventory Finished Goods Inventory COGS Beg. Bal.

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