ACCT 210 1st EditionExam 1 Study Guide: Lectures 1-8Lecture 1Costs:Variable costs:The cost per unit is the same, the total cost increases. Cost per unit remains constant with change in volume.Units Cost per unit Total cost12345$5$5$5$5$5$5$10$15$20$25Fixed costs:Total cost remains the same; cost per unit changesMixed costs:Involves both variable and fixed costs0 1 2 3 4 5010203040Mixed CostsVariable costFixed cost# of unitsTotal CostUnits Total Cost Cost per unit12345$12$12$12$12$12$12$6$4$3$2.400 1 2 3 4 50102030# of unitsTotal Cost1 2 3 4 5051015# of unitsTotal costLecture 2Contribution Margin:Contribution margin = Sales revenue – total variable expensesContribution margin income statements:General format: Sales revenue – Variable expenses= Total contribution margin– Total fixed expenses = Net incomeExample Contribution Margin Income StatementTotal Per Unit % of salesSales (100 hamburgeres) $200.00 $2.00 100% Less: Variable Expenses 60.00 0.60 30%Contribution Margin 140.00 1.40 70% Less: Fixed Expenses 40.00Net Income $100.00Important ratios for the contribution margin income statement:Variable cost ratio = Variable costs/salesContribution margin ratio = Contribution margin/salesStraight-line Cost Formula:y = mx + bb = y-intercept = fixed cost portiony = total costm = variable cost per unitx = number of unitsb = total fixed costmx = total variable costHigh-Low Method:Based on two points: Highest & lowest levels of activity and costs associated with it. Using thesepoints, compute variable cost per unit (VCPU).VCPU=Change∈total costChange∈activityLecture 3Break-Even Analysis:The break-even point is where total revenues = total expenses, i.e. net income = 0.TotalBreakeven∈units=¿ costs¿Contribution margin perunitTotalBreakeven∈sales= ¿ costs¿Contributionmargin ratioCost Volume Profit (CVP) Analysis:Focuses on the interactions between: prices of products, volume or level of activity, per unit variable costs, total fixed costs, mix of products sold.Formulas:1. Sales revenue = Selling price per unit * units sold2. Total variable cost = VC per unit * units sold3. Total fixed cost = fixed costs4. Operating income = Sales revenue – total variable costs – total fixed costsor…Operating income = (Per unit sales)x – (per unit variable)x – total fixedWhere x = number of units soldGraph approach to CVP:Margin of safety:Excess of budgeted (or actual) sales over the break-even volume of sales. States the amount by which sales can drop before losses begin to be incurred.Formulas:Margin of safety (dollars) = Actual sales – break even salesMargin of safety (units) = Actual units – break even unitsMargin of safety % = (Actual sales – Break even sales)/Actual salesLecture 4Target Income:“How much do I have to sell to make X dollars?”TotalRequired sales=¿ costs+ Target income¿Contribution Margin per unitorRequired sales= Breakeven+Target incomeContribution margin per unitOperating leverage:A measure of how sensitive net income is to percentage changes in sales. Acts as a multiplier; if operating leverage is high, a small percent increase in sales can produce a much larger percent increase in net income.Degree of operating leverage = Contribution margin/Net incomeIf degree of operating leverage = 5, a 5% increase in sales would result in a 25% increase in net income (5% * 5 = 25%).Sales Mix/Multi-productUse sales mix when a company is selling more than one product. The sales mix refers to the relative proportions in which a company’s products are sold.Example:Company sells jerseys and shoes. For every 4 pairs of shoes they sell, they also sell one jacket.Set x = # of jackets sold and 4x = # of shoes soldOperating income = (Contribution margin of jerseys * # of jerseys sold) + (CM of shoes * # ofshoes sold) – fixed costsOrOperating income = (CM of jerseys * x) + (CM of shoes * 4x) – fixed costsSolve for x.Weighted average contribution marginFor two productsWeighted average contribution margin = (Sales mix ratio * individual CM ratio for first product) +(Sales mix ratio * individual CM ratio for second product)For three productsWeighted average contribution margin = (Sales mix ratio * individual CM ratio for first product) +(Sales mix ratio * individual CM ratio for second product) + (Sales mix ratio * individual CM ratiofor third product)For four productsEtc…Lecture 5Product and period costs:Product costs:All Costs incurred in producing a product; included as inventory on the balance sheet. When units are sold, they are expensed as Cost of Goods Sold on the income statement.Includes:- Direct materials- Direct labor- Manufacturing overheadPeriod costsAssociated with the passage of time, not with the direct production of products; non-inventoriable. Also called selling, general, and administrative (SG&A).Includes:- Marketing Costs- Selling costs- Administrative costs- Other non-product costsLecture 6Period cost flowsThree stages of production:1. Work not started- Raw materials- Supplies2. Work in progress (conversion)- Direct laborTotal costsTotal costsProduct costsProduct costsDirectDirectDirect laborDirect laborDirect materialsDirect materialsIndirectIndirectManufacturing overheadManufacturing overheadPeriod costsPeriod costsGeneral & administrative (G&A) expensesGeneral & administrative (G&A) expensesSelling expensesSelling expenses- Overhead3. Finished work (includes all costs incurred to produce the productEach stage accounted for in the general ledger:- Raw materials inventory- Work in progress inventory- Finished goods inventoryAbove graphic translated into formulas:Beginning direct materials + purchases of DM – ending DM= DM flowing to Work in ProcessBeg. WIP + current manufacturing costs (DM/Direct labor/overhead) – end. WIP = Cost of goodsmanufacturedBeg. Finished goods + Cost of goods manufactured – end. finished goods = Cost of Goods SoldTotal manufacturing cost = DM + DL + MOHLecture 7Predetermined Application Rate (PAR)A “standard” rate based on budgeted activity used to “apply” overhead to products.POR=Estimated overheadEstimated activity levelOverhead allocated = PAR * actual activityRecording overheadAccountspayable Manufacturing overheadWork inprocessDebits:Actual overhead recorded as invoices are received(actual costs incurred)Credits:Applied overhead recordedduring the period as overhead is applied to a specific job (how you applied overhead)If the amount applied is greater