Managerial Accounting Exam 2 (Ch. 5, Ch. 6, Ch. 7) – Flashcards

• General Info. - 100 minutes for the chapter 5, 6 and 7 - You need to sit in a designated seat. • To be announced at the beginning of the exam. - Date: Nov. 14th (T) • Types - 30 MC (60 pts): • Answers ONLY on your scantron sheet will be graded •Definitions, concepts, relationships and computations - 4 to 6 sets of Open-ended questions (40 pts) • Similar/identical to homework problems and summary notes' examples. - Extra credit (5 pts) • Challenging

For unique products Record costs for individual jobs Total of all job records is added to WIP

For mass production Series of manufacturing processes (= steps) Series of manufacturing processes Cost per process is accumulated and physically moved from one process to another process Costs transferred to FG Inventory only from the WIP Inventory of the LAST manufacturing process When units are sold, cost is transferred out of FG Inventory into COGS

Table 1 1. Summarize the flow of physical units 2. Compute output in terms of equivalent units Table 2 3. Summarize total costs to account for 4. Compute the cost per equivalent unit Table 3 5. Assign total costs to units completed and to units in ending WIP

Units accounted for: Beginning work in process Started in production Total physical units to account for Units accounted for: Completed and transferred out Ending work in process

Units accounted for: Beginning work in process Started in production Total physical units to account for Units accounted for: Completed and transferred out Ending work in process Total physical units accounted for

= Costs in Beginning WIP + Costs added in the current period Beginning Work in process Costs added in the current period Total costs to account for

= Total costs ÷ Total EUs Beginning Work in process Costs added in the current period Total costs to account for Divided by total equivalent units Cost per equivalent unit

= EU x Cost per EU Completed and transferred out Ending WIP inventory Total costs accounted for

These are incurred in a previous process Not related to the current process

How costs (i.e. total costs) change as volume changes Four common cost behaviors -Variable costs -Fixed costs -Mixed costs (variable + fixed) -Step costs (a series of fixed costs)

A mathematical equation for a straight line to predict total cost TC = TVC + TFC =vxQ +TFC

Range of activity for which estimates and predictions are expected to be accurate One cost equation for one relevant range Difficult to assess costs outside the relevant range

1. Account analysis 2. Scatter plots 3. High-low method 4. Regression analysis

A relationship among costs, volume, and profit or loss A powerful tool to determine 1) the number of units to be sold or 2) sales amount to: - Break even - Achieve a certain level of profit

Profit Equation Profit = Sales - Total Costs = Sales - TVC - TFC = s x Q - v x Q - TFC Where: Profit: Operating income Q: Quantity of units SOLD s: Selling (or Sales) price per unit v: Variable cost per unit (= unit variable cost) TFC: Total fixed cost Fundamental to CVP analysis

Contribution margin = Sales - TVC = s x Q - v x Q = (s - v) x Q Profit (or Operating income) = Sales - TVC - TFC = CM - TFC

=CM / Q = (s - v) x Q / Q = s - v AMOUNT of INCREMENTAL profit when an ADDITIONAL UNIT is sold ( TFC is fixed). i.e. Increase in profit when one additional unit is sold.

= CM/Sales= Sales-TVC Sales/Sales = s x Q - v x Q / s x Q = s - v / s = Unit CM/s CM ratio= 1 - v / s

CM ratio = Unit CM/s Unit CM = s x CM ratio Unit CM x Q = s x CM ration x Q CM = Sales x CM ratio

1. Breakeven point in units (BEP in units) Q= TFC / Unit CM 2. Breakeven sales (BE sales) Sales = TFC / CM ratio = BEP in units x s

Units to be Sold Profit = s x Q - v x Q - TFC (s - v) x Q = Profit + TFC Q= Profit + TFC / (s - v) = Profit + TFC / Unit CM Sales Required sxQ = Profit + TFC / (s - v) x2 =Profit + TFC / ((s - v) / s) = Profit + TFC / CM ratio

Sales level where operating income (=profit) is ZERO - If sales > breakeven, then profit - If sales < breakeven, then loss 0=Sales-TVC-TFC = s x Q - v x Q - TFC Sales = TC = TVC + TFC OR CM (=Sales - TVC) = TFC

Excess of expected sales over BE sales -Margin of safety = Expected sales - BE sales Drop in sales that the company can absorb before incurring a loss Used to evaluate the risk of current operations as well as the risk of new plans

• Level of TFC versus TVC in a company • High level of fixed costs has a high operating leverage - Companies with high operating leverage have large fluctuations in profit when sales increase or decrease • Operating Leverage Factor - How responsive a company's operating income is to changes in volume = Contribution margin / Operating income = CM / (CM - TFC) - 1 when the company has no fixed costs - Higher than 1 as TFC increases. - If volume(Q) increases by c % • CM will increase by c % • Profit will increase by (c x Operating leverage factor) %