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MA; T3; SG

Managerial Accounting; Test 3 (ch20/21); Study Guide

QuestionAnswer
Management should continually review... the company's sales mix.
At any level of units sold: net income will be greater if more contribution margin units are sold than low contribution margin units.
Cost-Volume Profit analysis (CVP): is the study of the effects of changes in costs and volume on a company’s profit
CVP is important to profit planning & is a critical factor in determining: product mix, maximizing use of production facilities, & setting selling prices.
The CVP income statement: classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement.
The CVP income statement is as follows: Sales Var. Exp. COGS Sell Exp. Adm. Exp. Tot. Var. Exp. CM Fix Exp. COGF Sell. Exp. Adm. Exp. Tot. Fix Exp. NI
Contribution Margin (CM): is the amount of revenue remaining after deducting variable costs
CM is often stated both as... total amount & on a per unit basis.
CM can be expressed as... per unit amount or as a ratio.
Expenses can be... variable & fixed
Sales mix is... the relative percentage in which each product is sold when a company sells more than one product.
Sales mix is important to managers because... different products often have substantially different contribution margin.
Sales mix formula is: Product units / Total units sold = Sales Mix
When finding sales mix with limited resources, it is necessary to find the... contribution margin per unit of limited resources.
To find sales mix with limited resources... Contribution Margin per unit of each product / # of units of the limited resource required for each product
Production should be geared to... the product with the highest contribution margin per unit of limited resource.
Cost structure: refers to the relative proportion of fixed vs. variable costs that a company incurs.
Cost Structure can have... a significant effect on profitability.
With outsourcing, some companies have... reduced their fixed costs & increased their variable costs
Operating leverage refers to the degree to which a company's net income reacts to a change in sales.
Operating leverage is determined by a company's... relative use of fixed vs. variable costs.
Companies with high fixed costs relative to variable costs have... high operating leverage.
A company with high operating leverage will experience a sharp increase (decrease) in net income with a given increase (decrease) in sales.
The degree of operating leverage provides a measure of a company's earning volatility and can be used to compare companies
Operating leverage is computed as follows: Contribution Margin / Net Income = Degree of Operating Leverage
Management's decision-making process frequently involves the following steps: 1.) Identity the problem and assign responsibility. 2.) Determine and evaluate possible courses of action. 3.) Make a decision. 4.) Review results of the decision.
Incremental analysis is... the process used to identify the financial data that change under alternative courses of action
Incremental analysis includes... the probable effects of the decision on future earnings.
Data for incremental analysis involves: estimates and uncertainty.
Gathering data may involve: market analysts, engineers, and accountants.
In incremental analysis... both costs and revenues may change.
In some cases of incremental analysis, variable costs may not change under the alternative courses of action, while fixed costs do change
The more common types of decisions that involve incremental analysis are: 1.) Accept an order at a special price. 2.) Make or buy component parts or finished products. 3.) Sell products or process further. 4.) Retain or replace equipment. 5.) Eliminate an unprofitable business segment.
An order at a special price should be accepted when... the incremental revenue from the order exceeds the incremental costs.
It is assumed that sales in other markets will... not be affected by the special order.
If the units can be produced within existing plant capacity... generally only variable costs will be affected.
In a make or buy decision, management must determine... the costs which are different under the two alternatives.
Opportunity costs should be considered when... there is an opportunity to use the productive capacity for another purpose.
Opportunity costs is: the potential benefit that may be obtained by following an alternative course of action.
The Opportunity costs is an... additional cost of making the component.
Three important cost concepts are used to perform incremental analysis: Relevant, Opportunity, and Sunk costs
Relevant costs are the: factors costs and revenues that differ across alternatives in incremental analysis.
Cost and revenues that do not differ across alternative can be ___ when trying to choose between alternatives. ignored
Often in choosing one course of action, the company must... give up the opportunity to benefit from some other course of action
If a machine is used to make one type of product, the benefit of making another type of product is lost which is known as... Opportunity Cost.
A Sunk Cost is: costs that have already been incurred and will not be changed or avoided by any present or future decisions.
Sunk costs (are/are not) relevant cost. are NOT
The amount you spent in the past to purchase or repair a machine should (have/have no) bearing on your decision whether to buy a new machine. have no
In a decision to retain or replace equipment, management compares the costs which are affected by the two alternatives.
Generally, the costs that are affected by the two alternatives are.. variable manufacturing costs and the costs of the new equipment.
The book value of the old machine is a __ __ which does not affect the decision. sunk cost
A sunk cost is a: cost that cannot be changed by any present or future decision.
Sales Mix sheet; BE 20-9 part a Sales Mix (x) Contribution Margin Ratio (=) Weighted-Average Contribution Margin Ratio. List the Products (Candle Types) in the first column. Get the Total for the Weighted-Average Contribution Margin Ratio column.
Sales Mix sheet; BE 20-9 part b 1.) Fixed Costs / Total Weighted-Average Contribution Margin Ratio = Total Break-Even Sales in Dollars. 2.) Sales Mix (x) Total Break-Even Sales in Dollars (=) Sales Dollars Needed per Product. ****CHECK!: add the last column to get the TBESI$
Income Statement; Chapter 20 test problem; part b & c b.) Contribution Margin / Total Units = Contribution Margin per Unit. c.) Contribution Margin / Sales = Contribution Margin Ratio
Make or Buy; DO IT 21-2; part a 1.) (Row 1) Make --> Buy --> Net Income 2.)(Column 1) Direct Materials --> Direct Labor --> Variable Manu. Costs --> Fixed Manu. Costs (subtract Make from Buy for NI) --> Purchase Price (negative in NI). 3.) Total all
Make or Buy; DO IT 21-2; part b 1.) (Row 1) Make --> Buy --> Net Income 2.) (Column2) Total Costs (Totals from part a) --> Opportunity Costs --> Total Costs **The additional amount goes in OC. 3.) Total everything
P21-1A; part a 1.) (Row 1.) Reject Order ($0)--> Accept Order --> NI 2.) (Column 1) Revenues (special order units x $per unit) --> COGS (Amt-FC=/TU=xSO)-->S&AE(Amt-Fc=/TU=+IPU=*SO)-->NI 3.) Total everything
The formula for Break-even Point in Dollars is? Fixed Costs / Contribution Margin Ratio
The formula for Break-even Points in Units is? Fixed Costs / Weighted-Average Unit Contribution Margin
Created by: ibenoit95