Acctg 231 Exam 2

Front 1

Variable costs

Back 1

Varies in proportion to changes in the level of activity. Constant on a per unit basis

Front 2

Fixed cost

Back 2

Remains constant in total within relevant range. Fixed cost per unit varies inversely with changes in activity

Front 3

Committed fixed costs

Back 3

Relate to investments in facilities, equipment, and the basic organization of the company. These costs are hard to adjust.

Front 4

Discretionary fixed costs

Back 4

Result from annual decisions by management to spend on advertising, research, and management development programs. These costs are easier to adjust

Front 5

Cost formula for mixed cost

Back 5

Y=a+bX
y=total mixed cost
a=vertical intercept (total fixed cost)
b=slope of line (the variable cost)
X=(activity level)

Front 6

Quick and dirty method

Back 6

Way to estimate the variable and fixed costs. Draw a straight line on the scatter graph plot, the intercept of the line with vertical axis is the fixed cost, the slope of the line is the variable cost per unit of activity

Front 7

High-low method

Back 7

variable cost per unit of activity=change in cost/change in activity.
total cost at high activity level-variable portion:
high activity level*variable cost
=Fixed portion of the mixed cost

Front 8

Traditional format for an income statement

Back 8

Sales........
- cost of goods sold.....
=Gross margin
-Selling and administrative expenses
=Net operating income

Front 9

Contribution approach to the income statement

Back 9

Sales....
-variable expenses......
=contribution margin.....
-fixed expenses
=net operating income

Front 10

Contribution margin

Back 10

Sales-variable costs

Front 11

Unit contribution margin

Back 11

Unit selling price-unit variable expense

Front 12

Net operating income

Back 12

Contribution margin-fixed expenses

Front 13

Relation between contribution margin and net operating income helps...

Back 13

as a very powerful planning tool

Front 14

CM ratio

Back 14

Contribution margin/sales

Front 15

CM ratio of company with a single product

Back 15

Unit contribution margin/unit selling price

Front 16

Change in contribution margin

Back 16

Change in dollar sales*CM ratio
=Change in contribution margin

Front 17

Unit sales to attain target profit

Back 17

Fixed expenses+target profit/unit contribution margin

Front 18

Dollar sales to attain target profit

Back 18

Fixed expenses+target profit/CM ratio

Front 19

Break-even point in units sold

Back 19

Fixed expenses/unit contribution margin

Front 20

Break-even point in total sales dollars

Back 20

Fixed expenses/CM ratio

Front 21

Margin of safety

Back 21

The excess of budgeted sales over the break-even volume of sales. It is the amount by which sales can drop before losses begin to be incurred

Front 22

Margin of safety

Back 22

Total budgeted (or actual) sales - break even sales

Front 23

Cost structure

Back 23

The relative proportion of fixed and variable costs-has an impact on how sensitive a company's profits are to changes in sales. A company with low fixed costs and high variable will tend to have a lower CM ratio

Front 24

Operating leverage

Back 24

Refers to the effect a given percentage increase in sales will have on net operating income

Front 25

Degree of operating leverage

Back 25

Contribution margin/net operating income

Front 26

Percentage change in net operating income

Back 26

Percentage change in dollar sales x degree of operating leverage

Front 27

Sales mix

Back 27

Refers to the relative proportions in which the company's products are sold

Front 28

Overall CM ratio

Back 28

Overall contribution margin/overall sales

Front 29

Master budget

Back 29

Summary of the company's plans that sets specific targets for sales, production, and financing activities

Front 30

Planning

Back 30

Involves developing objectives and preparing budgets to achieve these objectives

Front 31

Control

Back 31

Involves the steps taken by management to increase the likelihood that all parts of the organization are working together to achieve the goals set down at the planning stage

Front 32

Budgeting benefits:

Back 32

1. The budget communicates managements plans throughout the entire organization. 2. The budget process forces managers to think ahead and formalize planning efforts. 3. The budgeting process provides a means of allocating resources. 4. Budgeting uncovers potential bottlenecks before they occur. 5. The budget coordinates the activities of the entire organization. 6. The budget provides goals and objectives that serve as benchmarks for evaluating subsequent performance

Front 33

Responsibility accounting

Back 33

Each managers performance should be judged by how well he or she manages the items under his or her control. Manager should be held responsible for differences between budget and actual results

Front 34

Sales budget (definition)

Back 34

The beginning point in the budgeting process. It details expected sales, in both units and dollars, for the budget period. The sales budget is accompanied with a schedule of expected cash collection

Front 35

Production budget (definition)

Back 35

In a manufacturing company, the sales budget is followed by the production budget that shows what must be produced to meet sales forecasts and to provide desired levels of inventory

Front 36

Production budget (format)

Back 36

Budgeted unit sales.....
+desired ending inventory
=total needs
-beginning inventory
=Required production

Front 37

Merchandise purchase budget (format)

Back 37

Budget unit sales
+desired ending inventory
=total needs
-beginning inventory
=required purchases

(In a merchandise company, this budget follows the sales budget)

Front 38

Direct materials budget (format)

Back 38

Raw materials required for production
+desired ending inventory
=total raw material needs
-beginning inventory
=raw materials to be purchased

(should be accompanied by a schedule of expected cash disbursments for raw materials)

Front 39

Cash budget format

Back 39

Cash balance, beginning
+receipts
=total cash available
-disbursments
=excess(deficiency) of cash available over disbursments
Financing
=cash balance, ending

Front 40

The "year" column

Back 40

as with the production budget and direct material budget, the year column is not simply the sum amounts for the quarters. The beginning cash balance is for the first month or quarter, and the ending cash balance for the year is the ending cash balance for the final month or quarter

Front 41

Standard

Back 41

is a benchmark or norm for evaluating performance.
1. Standards are set for both the quantity and price of inputs
2. actual quantities and prices of inputs are compared to the standards. Differences are called variances

Front 42

Ideal standards

Back 42

can only be obtained by the best employees working at top efficiency 100% of the time

Front 43

Practical standards

Back 43

allow for breakdowns and normal lost time. Practical standards are tight, but obtainable

Front 44

Direct material standards: Price Standards

Back 44

should reflect the final, delivered cost of materials, net of any cash discounts allowed

Front 45

Direct material standards: Quantity standards

Back 45

should reflect the amount of material that is required to make one unit of product, including allowances for unavoidable waste and spoilage

Front 46

The direct labor rate per hour

Back 46

should include wages, fringe benefits, employment taxes, and other labor-related costs

Front 47

The standard labor hours per unit

Back 47

should include allowances for rest breaks, personal needs of employees, clean up, and machine down time

Front 48

Product's standard cost card

Back 48

Price and quantity of materials, labor, and overhead for a product are summarized here

Front 49

Variance

Back 49

is a difference between standard and actual prices or standard and actual quantities

Front 50

The standard quantity allowed for the output*

Back 50

is the amount of an input that should have been used to complete the output of the period

Front 51

The materials price variance formula

Back 51

AQ(AP-SP)

AQ=actual quantity of the input purchased
AP=actual price of the input purchased
SP=standard price of unit

an unfavorable materials price variance has many possible causes, such as excessive freight costs, loss of quantity discounts, the wrong grade or type of materials
-Usually computed when materials are purchased

Front 52

The materials quantity variance formula

Back 52

SP(AQ-SQ)

AQ=actual quantity of the input used
SQ=Standard quantity of the input allowed for the actual output
SP=standard price of the input

an unfavorable materials quantity variance has possible causes, such as untrained workers, faulty machines, low quality materials
-Usually computed when materials are used in production

Front 53

Labor rate variance formula

Back 53

AH(AR-SR)

AH=actual labor hours
AR=actual labor rate
SR=standard labor rate
Possible causes of an unfavorable labor rate variance include poor assignment of workers to jobs, unplanned overtime, pay increases, and inaccurate standards

Front 54

Labor efficiency variance formula

Back 54

SR(AH-SH)

AH=Actual labor hours
SH=Standard labor-hours allowed for the actual output
SR=Standard labor rate
Possible causes of an unfavorable labor efficiency variance could include poorly trained workers, low quality materials, faulty equipment, poor supervision, insufficient work to keep everyone busy

Front 55

Variable overhead spending variance (same as direct labor equation)

Back 55

AH(AR-SR)

AH=actual hours (usually labor hours)
AR=actual variable manufacturing overhead rate
SR= standard variable manufacturing overhead rate

Front 56

Variable overhead efficiency variance

Back 56

SR(AH-SH)

AH=actual hours (usually labor hours)
SH=standard hours allowed for the actual output
SR=standard variable manufacturing overhead rate

Front 57

The least-squares regression method

Back 57

analyzes a mixed cost by fitting a straight line, called a regression line, to cost and activity data