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

2. 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

3. 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

4. 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

5. 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!

6. 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.

7. EXPANDED CONTRIBUTION MARGIN MODEL
PER UNIT X VOLUME = TOTAL %_
REVENUE $ $ %
VARIABLE EXP $
CONT. MARGIN $ X =
FIXED EXPENSES
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.

8. 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.

9. 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.