Chapter 1 Internal users information stays within the company a manager may request Managerial information Non GAAP Departmental divisional reporting Reports are prepared as needed Financial External users information is available to the public stockholders banks etc Complies with GAAP Company wide reporting shows the big Reports are prepared at the end of a picture period More timely relevance Less timely reliability Chapter 2 As the cost driver level increases Variable Fixed Mixed Total Cost Increases Stays Constant Increases Cost Per Unit Stays Constant Decreases Decreases As the cost driver level decreases Total Cost Cost Per Unit Variable Fixed Decreases Stays Constant Stays Constant Increases Mixed Increases Cost Behavior is the way a cost reacts to changes Decreases o The activity that causes costs to change is called the cost driver o Ex The cost driver of an electricity bill the cost object would be the output Variable Cost a cost that changes in total as a cost driver activity changes o A company manufactures cameras each camera needs a lens that will cost 10 the cost object is the camera lens Cost Driver Output Cost Per Lens Total Cost Fixed Cost a cost that does not change in total as the cost driver activity changes o You rent an apartment with three bedrooms no matter how many people you have stay in that apartment your rent will remain constant however your cost per person may change the cost object is the rent Cost Driver of people Cost Per Person Total Cost 10 10 10 600 300 200 3000 6000 12000 600 600 600 300 600 1200 1 2 3 in the short run things you can cut advertising research and development Discretionary Fixed Costs fixed costs that management has the ability to change Committed Fixed Costs fixed costs that the company cannot change in the short Mixed Costs a cost that has a fixed cost and a variable cost component run something you can t get out of a lease o The cost of an electric bill you have a fixed fee a fee that you will pay even if you use no electricity and your bill goes up with your usage Cost Estimation goal is to determine the amount of fixed and variable costs o Use a linear approach cost function y mx b Y total cost M variable cost per unit X activity level number of units B total fixed cost o This is used to estimate or predict future costs Scattergraph Visual Fit Method o This is the least accurate because there is no standardization o Calculate the fixed cost first o Given a scattergraph a line of best fit is drawn the point in which your line hits the y axis is your estimated fixed cost b o To get your slope m select two points and use the following formula High low Method y2 y1 x2 x1 o This is in the middle in terms of accuracy because everything is based on two points o Calculate the slope first o First identify the highest and lowest points based on cost driver activity o Using these two points determine the slope y2 y1 x2 x1 o Plug in the slope the total cost and the number of units into the cost function formula y mx b and solve for b You can use either the high or the low point both points will give you Regression Analysis the same answer o Statistical technique where you plug data into software and it calculates the cost function for you o Because it takes all historical data into account it is the most accurate Contribution Margin Analysis Sales Revenue Total Variable Expenses Total Fixed Expenses Operating Income 1 Contribution Margin Per Unit Sales Price Per Unit Variable Cost Per Unit Total amount left after variable expenses that can go towards fixed expenses and profit 2 Contribution Margin Sales Revenue Variable Expenses How much you make per unit that can go towards fixed expenses and profit 3 Contribution Margin Ratio Contribution Margin Sales Revenue Percent from every dollar you get in sales that go towards fixed expenses and profit Ex Tropical Smoothie sells smoothies for 3 each and their variable costs total to 1 80 They have a fixed expense of 4000 o What is the contribution margin per smoothie 3 00 1 80 1 20 o What is the contribution margin if 5000 smoothies were sold 3 x 5000 1 80 x 5000 15000 9000 6000 1 20 x 5000 will also give you 6000 o What is the contribution margin ratio 6000 15000 40 1 20 3 40 Sales Variable Expenses Contribution Margin Fixed Expenses Operating Income o What is the operating income if 5 000 smoothies are sold 15000 9000 6000 4000 2000 o What is the operating income if 10 000 smoothies are sold 30 000 18000 12000 4000 8000 In GAAP Sales COGS Gross Margin Selling and Administrative Expenses Operating Income Chapter 3 is zero The break even point is the point at which revenues equal expenses and net income o There is no net profit and there is no net loss o This can be expressed in units or in dollars Contribution Margin Technique o B E point in units Fixed Costs CMu CMu Price VCu Contribution Margin Ratio Technique o B E sales Fixed Costs CM Ratio Margin of Safety o Current Sales Breakeven Point Margin of Safety o This tells you how far sales can go down before you start losing money o This can be expressed in units or in dollars Cost Volume Profit Analysis o We can calculate the number of units we must sell in order to earn a certain amount of operating income o Target Units Fixed Costs Operating Income CMu o Target Sales Fixed Costs Operating Income CM Ratio product this is less practical o Cost Markup Sales Price o Sales Price Cost Markup Cost Cost Plus Pricing this is when a markup is added to the cost of producing a o Say you want a 25 markup on an item that cost you 3 to make x 3 25 3 so x 3 75 so x 3 75 your new price Target Costing this is when a company researches in order to determine a price that customers are willing to pay for a product this will determine the maximum cost that a company may have to produce a product while still making money this is more practical than cost plus pricing o Sales COGS manufacturing costs Gross Margin Profit o Gross Margin Gross Margin Sales o Your research says that customers are willing to pay 3 25 for your product and we want our gross margin to be 20 20 x 3 25 3 25 x 65 so x 2 60 You would charge 2 60 for your product so 3 25 x 20 x so x 65 Chapter 4 inventory Product Costs Manufacturing Costs costs incurred to manufacture a product o Direct Materials materials that can be traced directly to the final product steel tires paint o Direct Labor wages paid to worker who transform direct materials to a final product assembly line workers …
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