ACCT 210 1st Edition Exam 1 Study Guide Lectures 1 8 Lecture 1 Costs Variable costs 1 2 3 4 5 Total Cost 30 20 Units 10 Cost per unit 0 0 1 5 3 5 2 5 of units 5 5 The cost per unit is the same the total cost increases Cost per unit remains constant with change in volume Total cost 5 4 10 5 15 20 25 Fixed costs Total cost remains the same cost per unit changes 1 2 3 4 5 Total cost 15 10 Units 5 0 1 Total Cost Cost per unit 2 12 12 4 6 4 3 2 40 3 12 of units 12 12 12 5 Mixed costs Involves both variable and fixed costs Total Cost Mixed Costs 40 30 20 10 0 Variable cost Fixed cost 0 1 2 3 of units 4 5 Lecture 2 Contribution Margin Contribution margin Sales revenue total variable expenses Contribution margin income statements General format Sales revenue Variable expenses Total contribution margin Total fixed expenses Net income Example Contribution Margin Income Statement Total Sales 100 hamburgeres 200 00 Less Variable Expenses 60 00 Contribution Margin 140 00 Less Fixed Expenses 40 00 Net Income 100 00 Per Unit 2 00 0 60 1 40 of sales 100 30 70 Important ratios for the contribution margin income statement Variable cost ratio Variable costs sales Contribution margin ratio Contribution margin sales Straight line Cost Formula y mx b b y intercept fixed cost portion y total cost m variable cost per unit x number of units b total fixed cost mx total variable cost High Low Method Based on two points Highest lowest levels of activity and costs associated with it Using these points compute variable cost per unit VCPU VCPU Change total cost Change activity Lecture 3 Break Even Analysis The break even point is where total revenues total expenses i e net income 0 Total Breakeven units costs Contribution margin per unit Total Breakeven sales costs Contribution margin ratio Cost 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 sold 2 Total variable cost VC per unit units sold 3 Total fixed cost fixed costs 4 Operating income Sales revenue total variable costs total fixed costs or Operating income Per unit sales x per unit variable x total fixed Where x number of units sold Graph 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 sales Margin of safety units Actual units break even units Margin of safety Actual sales Break even sales Actual sales Lecture 4 Target Income How much do I have to sell to make X dollars Total Required sales costs Target income Contribution Margin per unit or Target income Required sales Breakeven Contribution margin per unit Operating 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 income If 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 product Use 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 sold Operating income Contribution margin of jerseys of jerseys sold CM of shoes of shoes sold fixed costs Or Operating income CM of jerseys x CM of shoes 4x fixed costs Solve for x Weighted average contribution margin For two products Weighted average contribution margin Sales mix ratio individual CM ratio for first product Sales mix ratio individual CM ratio for second product For three products Weighted 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 ratio for third product For four products Etc Lecture 5 Product and period costs Total costs Product Product costs costs Direct Direct labor Direct labor Period costs Period costs Indirect Direct materials Direct materials General General administrative G A expenses Selling expenses Manufacturing Manufacturing overhead overhead 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 overhead Period costs Associated with the passage of time not with the direct production of products noninventoriable Also called selling general and administrative SG A Includes Marketing Costs Selling costs Administrative costs Other non product costs Lecture 6 Period cost flows Three stages of production 1 Work not started Raw materials Supplies 2 Work in progress conversion Direct labor Overhead 3 Finished work includes all costs incurred to produce the product Each stage accounted for in the general ledger Raw materials inventory Work in progress inventory Finished goods inventory Above graphic translated into formulas Beginning direct materials purchases of DM ending DM DM flowing to Work in Process Beg WIP current manufacturing costs DM Direct labor overhead end WIP Cost of goods manufactured Beg Finished goods Cost of goods manufactured end finished goods Cost of Goods Sold Total manufacturing cost DM DL MOH Lecture 7 Predetermined Application Rate PAR A standard rate based on budgeted activity used to apply overhead to products Estimated overhead POR Estimated activity level Overhead allocated PAR actual activity Recording overhead Accounts payable Work in process Manufacturing overhead Debits Actual overhead recorded as invoices are received actual costs incurred Credits Applied overhead recorded during the period as overhead is applied to a specific job how you applied overhead If the amount applied is greater than the amount spent debits credits you under applied overhead To close the account bring back to zero you either increase COGS or allocate the increase to WIP FG and COGS If the amount spent is greater than the amount applied credits debits you over applied overhead To close the account bring back to zero you either decrease COGS or allocate the