Chapter 18
What does our breakeven point tell us?
Where total revenue = total costs; we need to operate above this level to turn a profit.
Name 3 good form JE rules.
- DRs first, then CRs.
- Transactions listed in chronological order.
- Short description below summarizing what is happening in the JE.
What is a sunk cost?
A cost that was previously incurred; not recoverable; and is not relevant when making future decisions.
What does "incremental" mean within incremental analysis?
What changes from alternative to alternative when we look at an alternative's impacts to revenues, costs, etc.
Calculate the Contribution Margin Ratio:
Sell Price = $40 per unit
Fixed Costs = $400
Net Income = $3,500
Variable Costs = $15 per unit
CM Ratio = CM per unit / Sell price per unit
25/40 = 62.5% (63% if we round up)
What is a weighted average unit contribution margin?
Tells us the average CM each unit we sell yields at a specific sales mix %.
What acronym do we use to help us make JEs?
DEALOR
Give me an example of an opportunity cost.
How do we determine if data is relevant in the decision-making process or not?
If it varies from alternative to alternative.
Define "relevant range" in CVP analysis.
The activity range on which our cost predictor equation is based. If we plug in values within this range, we can most likely accurately predict our TCs at that activity level.
Find Margin of Safety in Dollars:
Expected Sales are $250,000
Unit CM is $40 per unit
Breakeven Sales are $180,000
Actual/Expected Sales - Breakeven Sales = MoS $70,000
What does DEALOR mean; how do we use it?
DEA = Dividends, Expenses, Assets.
- Increase w/ DR, Decrease w/ CR
LOR = Liabilities, Owner's Equity, Revenue
- Increase w/ CR, Decrease w/ DR
What is contribution margin?
How much money we have leftover from sales revenue after deducting VC; this goes to cover FC and after that, towards profits.
Name 3 potential limited resources in a factory.
- Floor space
- Labor Hours
- Machine Hours
- Raw Materials
Calculate the required sales to hit a target net income of $20,000:
Fixed Costs = $60,000
Variable Costs = $1,000
CM Ratio = 40%
Required Sales = (FC + TNI)/CM Ratio
$200,000
How is FMOH treated in absorption (full) costing vs. variable costing?
Absorption = product cost
Variable = period cost
What 3 components make up product costs?
DM, DL and MOH
What are the 3 different cost behaviors?
Fixed, Variable, Mixed
How do we decide whether to make or buy a product in a "make or buy" business decision?
When incremental revenues outweigh incremental costs.
Calculate the WAUCM using the following data:
Blue Cars: Unit CM of $20, 30% of sales
Yellow Cars: Unit CM of $10, 10% of sales
Pink Cars: Unit CM of $45, 60% of sales
WAUCM = (P1 Unit CM * P1 % of sales) + (P2 "")...
$34
How do mixed costs behave at the "per unit" level and the "total cost" level?
They vary at both levels, and are not proportionate to changes in activity level.
Name 2 accounting tools we've talked about in this class so far, apart from the General Journal and JEs.
- Chart of Accounts
- General Ledger
- T-Accounts (live in the GL)
What is margin of safety?
How much ($ or %) our sales can decline before we start operating at a loss.
What is the Theory of Constraints?
Identifying the "bottlenecks" in our production process(es), eliminating them, repeat; this helps us be as efficient as possible in our business.
Why is Net Income greater under absorption costing when we produce more units than we sell during a time period?
Under the variable method, FMOH is treated as a period cost and the whole cost associated with units produced is expensed all at once, instead of based on units sold; therefore producing a lower net income than what absorption costing would produce.