ACG 2071 Notes Chapter 1 Managerial Accounting the gathering and preparing of accounting information used within the company Internal Users managers External Users investors and creditors Managerial Financial Internal users Non GAAP Divisional reporting as needed Future oriented Reports prepared as needed External Users GAAP Historical Company wide reporting Reports due at the end of the accounting period All types of organizations need managerial accounting Uses of Managerial Accounting Helps with four functions of management o Planning chapter 5 o Controlling chapter 6 9 10 o Evaluating chapter 6 9 10 o Decision making chapter 8 Approach to developing competitive advantage Product differentiation vs Low cost production Approach to market share Build Hold Harvest Divert Monitoring Strategic Performance Balanced Scorecard Supply Chain Management Just in Time JIT Inventory Enterprise Resource Planning ERP Systems Ethical Considerations Right vs Wrong and its application Read Focus on C C Sports at the end of the chapter Chapter 2 Cost Estimation Cost behavior patterns Cost equation function Contribution format income statement Activity levels that drive costs Four Common Cost Behaviors Variable Fixed example Ingredients vs Rent Driver sold smoothies Cost Behavior refers to the way a cost behaves reacts to changes in activity levels 1 Variable cost changes in total as the driver activity changes in direct proportion 2 Fixed cost remains constant in total regardless of driver activity changes 3 Step remains constant for a small range of activity but changes abruptly outside the window 4 Mixed contains both fixed and variable components Variable Fixed Ingredients 50 smoothie Rent 2000 month 2000 sold 1000 2000 sold 2000 2500 sold 1250 2500 sold 2000 cost per smoothie is cost per smoothie decreases with more sold Variable vs Fixed Variable per unit is constant Fixed in total is constant How a cost behaves in total is opposite of how it behaves per unit Discretionary Fixed Cost management has the ability to change in the short run Committed Fixed Cost company can t change this cost in the short run Step Cost example Cups cost 25 package of 100 cups 50 cups 25 100 cups 25 150 cups 50 201 cups 75 Step variable has more steps than step fixed cost behavior so basically cups 1000 per package is more fixed than cups 100 per package Mixed Cost example Phone service 25 month Fixed Long distance 10 call Variable Cost Estimation Goal is to separate mixed costs Three Methods 1 Scatter graph visual fit Not on Exam 2 High Low 3 Regression A linear approach is used in which a line cost function is drawn to fit the data Y m x b Y is total cost M is cost per unit X is activity level and B is the fixed cost point at which it crosses y axis We can predict using x for activity Electricity cost activity per usage hour cost denotes change in High Low the line is place from highest and lowest points of activity Calculate variable per unit cost then fixed cost Regression Analysis uses stat software to derive a cost function from all data Recap 10 minute variable up with usage 50 month fixed constant in total Step changes in range variable step changes more often than fixed think stairs vs bleachers Cost function Y mx b total cost variable cost fixed cost Variable cost cost unit of units Chapter 2 Continued Cost Estimation and the Relevant Range The rules of cost behavior only hold true within reasonable limits relevant range The relevant range represents the normal level of operating activity Contribution Margin Analysis Sales Revenue Total Expenses total variable and total fixed Operating Income Sales Rev Total Variable Total Fixed Operating Income price per unit sold variable cost per unit sold fixed operating income price per unit variable cost per unit sold fixed operating income Example Sales Variable Expense Contribution Margin Sales 15000 Variable Expenses Cost per smoothie 3 1 80 1 20 For 5000 smoothies 15000 9000 6000 Ratio sales 100 60 40 COGS 1 3 5000 6500 Selling and Administrative 50 5000 2500 Contribution Margin 6000 Fixed Expenses 4000 Operating Income 2000 GAAP Income Statement looks like Sales COGS Gross Profit Selling and Admin Expenses Operating Income 15000 10000 5000 3000 2000 Non GAAP Sales Variable Costs GAAP Sales COGS Contribution Margin Gross Margin Fixed Costs S A Expenses Operating Income Operating Income Chapter 3 Break Even Analysis Break Even Point when revenue expenses and income 0 The point can be expressed as the level of sales in units or dollars Three Methods 1 Equation 2 Contribution Margin 3 Contribution Margin Ratio Sales VC FC 0 FC CM units Example Example Calculate in units using the equation method Sales VC FC op income 0 3x 1 8x 4000 1 2x 4000 x 3333 smoothies to break even Calculate in units using the contribution margin technique Sales 3 smoothie VC 1 8 smoothie CM 1 2 smoothie Example FC CM unit 4000 1 2 3333 smoothies to break even Calculate in dollars using the equation method Sales 3 smoothie Ratio 100 Sales VC FC op income 0 VC 1 8 smoothie CM 1 2 smoothie Ratio 60 Ratio 40 S 6S 4000 0 4S 4000 Sales 10000 Example Calculate in dollars using contribution margin ratio method FC CM Break Even point 4000 40 10000 Margin of Safety How much can sales drop before we lose money Current Sales Break Even Sales Margin of Safety Example 5000 smoothies month 3333 smoothies 1667 smoothies 15000 10000 5000 Cost Volume Profit Analysis Helps us understand the impact of various decisions on the company s profit FC CM unit BE pt in units FC CM BE pt in dollars Target Operating Income replace 0 with this number in the equation In units equation technique S VC FC Op Income Ex 3x 1 8x 4000 20000 solve for x In units contribution margin method FC Target Op Income CM per unit number of units needed In dollars equation technique Ex S 6S 4000 20000 where S is sales in dollars In dollars contribution margin ratio method FC Target Op Income CM Target Net Income Net income operating income taxes If a target net income is desired we can convert it into target operating income Net Income 1 Tax Rate Operating income Ex tax rate 30 NI OI 30 OI NI 7 OI What if Analysis Changes in sales price per unit Changes in variable cost per unit Changes in fixed cost in total Price increase Break Even pt decrease Price decrease Break Even pt increase Variable Cost decrease BE pt decrease Variable Cost increase BE pt increase Fixed Cost decrease BE pt decrease Fixed Cost increase BE pt increase CM unit
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