1. Business Fundamentals: Accounting Prof. Salem Helles

2. Work of Management Planning Controlling Directing and Motivating

3. Planning Identify alternatives. Select alternative that does the best job of furthering organization’s objectives. Develop budgets to guide progress toward the selected alternative.

4. Directing and Motivating Directing and motivating involves managing day-to-day activities to keep the organization running smoothly. –Employee work assignments. –Routine problem solving. –Conflict resolution. –Effective communications.

5. Controlling The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

6. Planning and Control Cycle Decision Making Formulating long- and short-term plans (Planning) Measuring performance (Controlling) Implementing plans (Directing and Motivating) Comparing actual to planned performance (Controlling) Begin Exh. 1-1

7. Comparison of Financial and Managerial Accounting Exh. 1-2

8. Comparing Merchandising and Manufacturing Activities Merchandisers... –Buy finished goods. –Sell finished goods. Manufacturers... –Buy raw materials. –Produce and sell finished goods. MegaLoMart

9. Balance Sheet Merchandiser Current assets  Cash  Receivables  Prepaid Expenses  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Prepaid Expenses u Inventories Raw Materials Work in Process Finished Goods

10. Balance Sheet Merchandiser Current assets  Cash  Receivables  Prepaid Expenses  Merchandise Inventory Manufacturer Current Assets u Cash u Receivables u Prepaid Expenses u Inventories Raw Materials Work in Process Finished Goods Partially complete products – some material, labor, or overhead has been added. Completed products awaiting sale. Materials waiting to be processed.

11. The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

12. Inventory Flows Beginning balance $$ Beginning balance $$ Additions $$$ + Available $$$$$ = Ending balance $$ Ending balance $$ = Withdrawals $$$ _ Available $$$$$

13. Quick Check If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month? A. $1,000. B. $ 800. C. $1,200. D. $ 200.

14. Quick Check If your inventory balance at the beginning of the month was $1,000, you bought $100 during the month, and sold $300 during the month, what would be the balance at the end of the month? A. $1,000. B. $ 800. C. $1,200. D. $ 200. $1,000 + $100 = $1,100 $1,100 - $300 = $800

15. Schedule of Cost of Goods Manufactured Calculates the cost of raw material, direct labor and manufacturing overhead used in production. Calculates the manufacturing costs associated with goods that were finished during the period.

16. As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost Flows

17. Conversion costs are costs incurred to convert the direct material into a finished product. Product Cost Flows

18. All manufacturing costs incurred during the period are added to the beginning balance of work in process.

19. Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.

20. Product Cost Flows

21. Manufacturing Cost Flows Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material PurchasesRaw Materials

22. Quick Check Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A.$276,000 B.$272,000 C.$280,000 D.$ 2,000

23. Quick Check Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A.$276,000 B.$272,000 C.$280,000 D.$ 2,000

24. Quick Check Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A.$555,000 B.$835,000 C.$655,000 D.Cannot be determined.

25. Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A.$555,000 B.$835,000 C.$655,000 D.Cannot be determined. Quick Check

26. Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A.$1,160,000 B.$ 910,000 C.$ 760,000 D.Cannot be determined.

27. Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A.$1,160,000 B.$ 910,000 C.$ 760,000 D.Cannot be determined. Quick Check

28. Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000.

29. Quick Check Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000. $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000

30. Every decision involves a choice between at least two alternatives. Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored. Cost Classifications for Decision Making

31. Differential Costs and Revenues Costs and revenues that differ among alternatives. Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. Differential revenue is: $2,000 – $1,500 = $500 Differential cost is: $300

32. Opportunity Costs The potential benefit that is given up when one alternative is selected over another. Example: If you were not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.

33. Sunk Costs Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions. Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

34. Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

35. Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

36. Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

37. Quick Check Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don’t want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

38. Quick Check Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

39. Quick Check Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

40. The Contribution Format The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.

41. The Contribution Format Used primarily for external reporting. Used primarily by management.

42. Cost-Volume-Profit Relationships

43. Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.

44. Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income.

45. The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit.

46. The Contribution Approach Each month Racing must generate at least $80,000 in total CM to break even.

47. The Contribution Approach 400 units If Racing sells 400 units in a month, it will be operating at the break-even point.

48. The Contribution Approach 401 bikes If Racing sells one more bike (401 bikes), net operating income will increase by $200.

49. The Contribution Approach We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit. If Racing sells 430 bikes, its net income will be $6,000.

50. CVP Relationships in Graphic Form The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a CVP graph. Racing developed contribution margin income statements at 300, 400, and 500 units sold. We will use this information to prepare the CVP graph.

51. CVP Graph Units Dollars In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis.

52. CVP Graph Units Dollars Fixed Expenses

53. CVP Graph Dollars Units Fixed ExpensesTotal Expenses

54. CVP Graph Fixed Expenses Dollars Total ExpensesTotal Sales Units

55. CVP Graph Dollars Units Break-even point (400 units or $200,000 in sales) Profit Area Loss Area

56. Contribution Margin Ratio The contribution margin ratio is: For Racing Bicycle Company the ratio is: Total CM Total sales CM Ratio = Each $1.00 increase in sales results in a total contribution margin increase of 40¢. = 40% $80,000 $200,000

57. Contribution Margin Ratio Or, in terms of units, the contribution margin ratio is: For Racing Bicycle Company the ratio is: $200 $500 = 40% Unit CM Unit selling price CM Ratio =

58. Contribution Margin Ratio A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40% = $20,000) A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40% = $20,000)

59. Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139

60. Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139 Quick Check Unit contribution margin Unit selling price CM Ratio = = ($1.49-$0.36) $1.49 = $1.13 $1.49 = 0.758

61. Changes in Fixed Costs and Sales Volume What is the profit impact if Racing can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000?

62. Changes in Fixed Costs and Sales Volume $80,000 + $10,000 advertising = $90,000 Sales increased by $20,000, but net operating income decreased by $2,000.

63. Changes in Fixed Costs and Sales Volume The Shortcut Solution

64. Change in Variable Costs and Sales Volume What is the profit impact if Racing can use higher quality raw materials, thus increasing variable costs per unit by $10, to generate an increase in unit sales from 500 to 580?

65. Change in Variable Costs and Sales Volume 580 units × $310 variable cost/unit = $179,800 Sales increase by $40,000, and net operating income increases by $10,200.

66. Change in Fixed Cost, Sales Price and Volume What is the profit impact if Racing (1) cuts its selling price $20 per unit, (2) increases its advertising budget by $15,000 per month, and (3) increases unit sales from 500 to 650 units per month?

67. Sales increase by $62,000, fixed costs increase by $15,000, and net operating income increases by $2,000. Change in Fixed Cost, Sales Price and Volume

68. Change in Variable Cost, Fixed Cost and Sales Volume What is the profit impact if Racing (1) pays a $15 sales commission per bike sold instead of paying salespersons flat salaries that currently total $6,000 per month, and (2) increases unit sales from 500 to 575 bikes?

69. Change in Variable Cost, Fixed Cost and Sales Volume Sales increase by $37,500, variable costs increase by $31,125, but fixed expenses decrease by $6,000.

70. Change in Regular Sales Price If Racing has an opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses, what price would it quote to the wholesaler if it wants to increase monthly profits by $3,000?

71. Change in Regular Sales Price

72. Break-Even Analysis Break-even analysis can be approached in two ways: 1.Equation method 2.Contribution margin method

73. Equation Method Profits = (Sales – Variable expenses) – Fixed expenses Sales = Variable expenses + Fixed expenses + Profits OR At the break-even point profits equal zero

74. Break-Even Analysis Here is the information from Racing Bicycle Company:

75. Equation Method We calculate the break-even point as follows: Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80,000 + $0 Where: Q = Number of bikes sold $500 = Unit selling price $300 = Unit variable expense $80,000 = Total fixed expense

76. Equation Method $500Q = $300Q + $80,000 + $0 $200Q = $80,000 Q = $80,000 ÷ $200 per bike Q = 400 bikes We calculate the break-even point as follows: Sales = Variable expenses + Fixed expenses + Profits

77. Equation Method The equation can be modified to calculate the break-even point in sales dollars. Sales = Variable expenses + Fixed expenses + Profits X = 0.60X + $80,000 + $0 X = 0.60X + $80,000 + $0 Where: X = Total sales dollars 0.60 = Variable expenses as a % of sales $80,000 = Total fixed expenses

78. Equation Method X = 0.60X + $80,000 + $0 0.40X = $80,000 X = $80,000 ÷ 0.40 X = $200,000 Sales = Variable expenses + Fixed expenses + Profits The equation can be modified to calculate the break-even point in sales dollars.

79. Contribution Margin Method The contribution margin method has two key equations. Fixed expenses Unit contribution margin = Break-even point in units sold Fixed expenses CM ratio = Break-even point in total sales dollars

80. Contribution Margin Method Let’s use the contribution margin method to calculate the break-even point in total sales dollars at Racing. Fixed expenses CM ratio = Break-even point in total sales dollars $80,00040% = $200,000 break-even sales

81. Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in units? a.872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in units? a.872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups

82. Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in units? a. 872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in units? a. 872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups Quick Check Fixed expenses Unit CM Break-even = $1,300 $1.49/cup - $0.36/cup = $1,300 $1.13/cup = 1,150 cups =

83. Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129 Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129

84. Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129 Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the break-even sales in dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129 Quick Check Fixed expenses CM Ratio Break-even sales $1,300 0.758 = $1,715 = =

85. Target Profit Analysis The equation and contribution margin methods can be used to determine the sales volume needed to achieve a target profit. Suppose Racing Bicycle Company wants to know how many bikes must be sold to earn a profit of $100,000.

86. The CVP Equation Method Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80,000 + $100,000 $200Q = $180,000 Q = 900 bikes

87. The Contribution Margin Approach The contribution margin method can be used to determine that 900 bikes must be sold to earn the target profit of $100,000. Fixed expenses + Target profit Unit contribution margin = Unit sales to attain the target profit $80,000 + $100,000 $200/bike = 900 bikes

88. Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month? a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month? a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups

89. Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month? a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month? a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups Quick Check Fixed expenses + Target profit Unit CM Unit sales to attain target profit = 3,363 cups = $3,800 $1.13 $1,300 + $2,500 $1.49 - $0.36 = =

90. The Margin of Safety The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. Margin of safety = Total sales - Break-even sales Let’s look at Racing Bicycle Company and determine the margin of safety.

91. The Margin of Safety If we assume that Racing Bicycle Company has actual sales of $250,000, given that we have already determined the break-even sales to be $200,000, the margin of safety is $50,000 as shown

92. The Margin of Safety The margin of safety can be expressed as 20% of sales. ($50,000 ÷ $250,000)

93. The Margin of Safety The margin of safety can be expressed in terms of the number of units sold. The margin of safety at Racing is $50,000, and each bike sells for $500. Margin of Safety in units == 100 bikes $50,000 $500

94. Quick Check Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the margin of safety? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the margin of safety? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups

95. Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the margin of safety? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the margin of safety? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups Quick Check Margin of safety = Total sales – Break-even sales = 950 cups = 2,100 cups – 1,150 cups or 950 cups 2,100 cups Margin of safety percentage == 45%