Exam 4 Review – Condensed- Exam Question Overviewo Chapter 1 (1 question) Financial vs. managerial accountingo Chapter 2 (3 questions) Cost behavior, high-low method, contribution margin vs. gross margino Chapter 3 (3 questions) Breakeven point & target operating income - Units and $ 1 conceptual question (most likely on how different changes effect breakeven point)o Chapter 4 (1 question) Applying overheado Chapter 7 (1 question) Activity Based Costingo Chapter 8 (5 questions) 1 question for each decision (each gone over separately in review)o Chapter 5 (4 questions) Cash collections/ disbursements, Accounts Receivable/ Payable, cash-budget financing, and productiono Chapter 6 (3 questions) Flexible budget variance, price/rate variance, quantity varianceo Chapter 9 (7 questions) NPV, IRR, payback period, ARR, 2 conceptualo Chapter 10 (7 questions) Conceptually know decentralization, ROI (also drawbacks), RI, transfer pricing - Chapter 1 (1 question)o Financial vs. Managerial Accounting Users: Internal vs External Rules: None vs GAAP Reporting Unit: Organizational Units vs Whole organization Time Horizon: Past results + projected future vs past results Timing: As needed vs end of accounting period- Chapter 2 (3 questions, 1 conceptual)o Cost BehaviorVariable costs Any total cost that varies in proportion to a business activity 10% increase in volume results in 10% increase in total variable costFixed costs Does not change with activity level Discretionary Fixed Costs- fixed costs that can be changed over the short run Committed fixed costs- cannot be changed over the short run Fixed in total, but changes on a per unit basis (becomes cheaper as more units are used)- Like spreading the cost out over more unitsStep costs Fixed over only a small range of activity Total cost remains constant over step range but unit cost decreases as usage within step range increasesMixed costs Composed of both a fixed and variable cost componento High-Low Method 1. Identify highest and lowest levels of activity (based on activity) 2. Compute variable cost per unit (slope of the line) - change in cost/ change in activity = variable cost 3. Calculate fixed cost by either high or low point - Fixed costs = total costs – variable costs 4. Complete cost equation: (variable cost per unit x units) + fixed costs = total costso Contribution Margin vs. Gross Margin GAAP Format- Sales - - COGS- = Gross Profit- - Selling and Administrative expense- = Operating Income Contribution Margin Format- Sales Revenue- - Variable Expenses- = contribution margin- - Fixed Expenses = Operating Income- Chapter 3 (3 questions, 1 conceptual)o Breakeven Point and Target Operating IncomeBreakeven analysis* Set Operating Income to 0 Sales – VC - FC= Operating Income- Sale price (x) – vc per unit (x) – FC = operating income Breakeven point in units = total fixed expenses / contribution margin per unit Breakeven point in dollars = total fixed expenses / contribution margin ratio- Contribution margin ratio= 1- (VC/sales) Know what happens to breakeven point when variable costs, etc. increase/ decreaseTarget operating income* Set profit equation to target operating income and solve for variables Units required to meet target OI = Total FC + Target OI / CM per unit- What you have to earn in total / CM per unit Dollars required to meet target OI = total FC + Target OI / CM ratio- What you have to earn in total /CM ratioo Conceptual Question (other possible topics)Operating leverage Operating leverage = contribution margin / net operating income Higher operating leverage is riskier but can contribute to higher gains Higher fixed costs = higher operating leveragePricingCost-plus pricing Adds an amount to the cost of the product or service to cover the company’s operating costs and contribute to its profit Cost + Markup = sales price What it costs you + what you want to make in profit = what you sell it forTarget costing Starts with price consumers are willing to pay Find out price consumers are willing to pay - % profit you want to make =amount you must be able to produce the product for- Chapter 4 (1 question)o Applying Overheado Predetermined overhead rate=Budgeted total manufacturing overhead cost Budgeted total level of application baseo Applied overhead= predetermined overhead rate * actual amount of application baseo Disposing of under- or over-applied overheado Underapplied overhead- recorded less overhead than what incurred Results in a debit balance in manufacturing overhead control account Inventory cost too low; needs to be increasedo Overapplied overhead- recorded more overhead than what incurred Inventory cost too high; needs to be decreasedo Small amount make adjustments to cost of goods sold Underapplied= debit to COGS (increased) Overapplied=credit to COGS (decreased)o Prorating Overapplied and Underapplied overhead Add balances of WIP inventory, finished goods inventory, and COGS Calculated percentage each represented of total Multiply percentage by under or overapplied amount - Chapter 7 (1 question)o Activity Based Costingo Costing technique that assigns costs to cost objects such as products or customers, based on the activities those cost objects requireo Like applying overhead, but instead of having one cost driver for all activities,you have a different and more relevant cost driver for each activityo Activity is an event that consumes resourceso Costs(payment) acquire resources(sewing machine) that are consumed by activities(sewing) to produce products(jerseys, etc.)o Unit level activities are performed for each individual unit of product providing electricity to sewing machine since amount used is proportionate to number of units sewno batch level activities are performed all at once on groups of products cost to produce batch is same regardless of how many units are in batcho product-level activities support the products or services a company provides activities performed for entire product line regardless of how many units or batches are producedo customer level activities- performed for specific customers activities such as sales calls and processing sales orderso organization level activities are required to provide productive capacity and tokeep business in operation no
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