Accounting: What the Numbers Mean Study Outline and Overhead Master Chapter 12

MANAGERIAL ACCOUNTING COMPARED TO FINANCIAL ACCOUNTING KEY CHARACTERISTICS THAT DIFFER   SERVICE PERSPECTIVE BREADTH OF CONCERN REPORTING FREQUENCY AND PROMPTNESS DEGREE OF PRECISION OF DATA USED REPORTING STANDARDS

COST CLASSIFICATIONS KEY IDEA DIFFERENT COSTS FOR DIFFERENT PURPOSES.   FOR COST ACCOUNTING PURPOSES (CH 12, 14, & 15): PRODUCT COST PERIOD COST RELATIONSHIP TO PRODUCT OR ACTIVITY (CH 13): DIRECT COST INDIRECT COST RELATIONSHIP BETWEEN TOTAL COST AND VOLUME OF ACTIVITY (CH 13): VARIABLE COST FIXED COST TIME-FRAME PERSPECTIVE (CH 14 & 15): COMMITTED COST DISCRETIONARY COST CONTROLLABLE COST NONCONTROLLABLE COST FOR OTHER ANALYTICAL PURPOSES (CH 16): DIFFERENTIAL COST ALLOCATED COST SUNK COST OPPORTUNITY COST

RELATIONSHIP OF TOTAL COST TO VOLUME OF ACTIVITY KEY IDEA   COST BEHAVIOR PATTERN: DESCRIBES HOW TOTAL COST VARIES WITH CHANGES IN ACTIVITY. KEY RELATIONSHIPS VARIABLE COST FIXED COST KEY ASSUMPTIONS RELEVANT RANGE LINEARITY

COST FORMULA KEY POINT   A COST FORMULA DESCRIBES THE EXPECTED TOTAL COST FOR ANY VOLUME OF ACTIVITY, USING COST BEHAVIOR INFORMATION. KEY RELATIONSHIP TOTAL = FIXED + VARIABLE   COST COST COST = FIXED + (VARIABLE COST RATE PER UNIT * ACTIVITY) KEY IDEA WHENEVER POSSIBLE, AVOID UNITIZING FIXED COSTS, BECAUSE THEY DO NOT BEHAVE THAT WAY!

INCOME STATEMENT MODELS TRADITIONAL MODEL REVENUES - COST OF GOODS SOLD GROSS PROFIT - OPERATING EXPENSES OPERATING INCOME   CONTRIBUTION MARGIN MODEL - VARIABLE EXPENSES CONTRIBUTION MARGIN - FIXED EXPENSES KEY IDEAS THE TRADITIONAL MODEL CLASSIFIES EXPENSES BY FUNCTION, AND THE CONTRIBUTION MARGIN MODEL CLASSIFIES EXPENSES BY COST BEHAVIOR PATTERN. THE CONTRIBUTION MARGIN MODEL IS USEFUL FOR DETERMINING THE EFFECT ON OPERATING INCOME OF CHANGES IN THE LEVEL OF ACTIVITY.

EXPANDED CONTRIBUTION MARGIN MODEL PER UNIT X VOLUME = TOTAL %_ REVENUE $ 1. $ 100%   VARIABLE EXP. $ 1. CONT. MARGIN $ 1. X 2. = 2. FIXED EXPENSES 3. OPERATING INCOME $ 3. KEY IDEAS THE PREFERRED ROUTE THROUGH THE MODEL IS: TO ENTER PER UNIT REVENUE AND VARIABLE EXPENSES TO GET UNIT CONTRIBUTION MARGIN. THEN MULTIPLY UNIT CONTRIBUTION MARGIN BY VOLUME (QUANTITY SOLD) TO GET TOTAL CONTRIBUTION MARGIN. FIXED EXPENSES ARE NOT EXPRESSED ON A PER UNIT BASIS; THEY ARE SUBTRACTED FROM TOTAL CONTRIBUTION MARGIN TO GET OPERATING INCOME. THE CONTRIBUTION MARGIN RATIO EXPRESSES CONTRIBUTION MARGIN AS A PERCENTAGE OF REVENUES, ON EITHER A PER UNIT OR TOTAL BASIS.

BREAK-EVEN POINT ANALYSIS KEY IDEA   MANAGERS FREQUENTLY WANT TO KNOW THE NUMBER OF UNITS THAT MUST BE SOLD, OR THE TOTAL SALES DOLLARS REQUIRED, TO BREAK-EVEN (HAVE ZERO OPERATING INCOME). BREAK-EVEN GRAPH    KEY POINT ONCE THE BREAK-EVEN POINT HAS BEEN REACHED, OPERATING INCOME INCREASES BY THE AMOUNT OF CONTRIBUTION MARGIN FROM EACH ADDITIONAL UNIT SOLD.

KEY ASSUMPTIONS TO REMEMBER WHEN USING CONTRIBUTION MARGIN ANALYSIS COST BEHAVIOR PATTERNS CAN BE IDENTIFIED.   COSTS ARE LINEAR WITHIN THE RELEVANT RANGE. ACTIVITY REMAINS WITHIN THE RELEVANT RANGE. SALES MIX OF THE FIRM’S PRODUCTS WITH DIFFERENT CONTRIBUTION MARGIN RATIOS DOES NOT CHANGE. KEY POINT IF THESE SIMPLIFYING ASSUMPTIONS ARE NOT VALID, THE ANALYSIS IS MADE MORE COMPLICATED BUT THE CONCEPTS ARE STILL APPLICABLE.