# Managerial Accounting Exam 2 Study Guide – Flashcards

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Break-even point
the level of sales at which profit is zero -Once the break even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold. - To estimate the profit at any sales volume above the break even pint, multiply the number of units sold in excess of the break even point by the unit contribution margin = anticipated profits for the period. -Or to estimate the effect of a planned increase in sales on profits, simply multiply the increase in units sold by the unit contribution margin. -Summary Explanation: if sales are zero, the company's loss would equal its fixed expenses. Each unit that is sold reduces the loss by the amount of the unit contribution margin. Once the break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin. Formula method: Units sales to break even=fixed expenses/Unit CM Equation method: Profit= Unit CM x Q - Fixed expense
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Contribution margin ratio
A ratio computed by dividing contribution margin by dollar sales. CM ratio= Total CM/ Total Sales CM Ratio= Unit CM/ Unit selling price - CM ratio shows how the CM will be affected by a change in total sales ex. Acoustic Concepts CM ration of 40 percent means that for each dollar increase in sales, total CM will increase by 40 cents. Change in CM = CM ratio X Change in sales - the impact on net operating income of any given d0llar change in total sales can be computed by applying the CM ration to the dollar change.
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cost-volume profit graph
A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.
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Degree of Operating leverage
A measure at a given level of sales of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income
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Incremental analysis
An analytical approach that focuses only on those costs and revenues that change as a result of a decision
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Margin of safety
- The excess of budgeted or actual dollar sales over the break even dollar sales. - It is the amount by which sales can drop before losses are incurred -The higher the margin of safety the lower the risk of not breaking even and incurring loss Formula: Margin of safety in dollars = Total budgeted (or actual) sales - break-even sales Margin of safety percentage = Margin of safety in dollars / total budgeted (or actual) sales in dollars
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Operating leverage
A measure of how sensitive net operating income is to a given percentage change in dollar sales. - if operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income. Equation: Degree of operating leverage = Contribution Margin/ Net operating income Percentage change in net operating income= Degree of operating leverage X Percentage change in sales Note: If 2 companies have the same total revenue and same total expense but different cost structures then the company with the higher proportion of fixed costs in its cost structure will have higher operating leverage. -Degree of operating leverage is not a constant
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Sales mix
The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales. - If sales mix changes most likely break even point will change too.
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Target profit analysis
Estimating what sales volume is needed to achieve a specific target profit. Equation Method: To find in Units----> Profit = Unit CM x Q - Fixed expense To find in dollars----> Profit= CM ratio X sales - fixed expenses Formula Method: To find in Units----> Units sales to attain the target profit = Target profit + fixed expenses/ Unit CM To find in dollars----> Dollar sales to attain a target profit = Target profit + fixed expenses / CM ratio
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Variable expense ratio
A ration computed by dividing variable expenses by dollar sales. Variable Expense Ratio= Variable expenses / Sales Variable Expense Ratio in units = variable expenses per unit/unit selling price This leads to a useful equation that relates the CM ratio to the variable expense ratio: CM ratio= CM/Sales CM ratio= Sales-Variable Expenses/ Sales CM ratio= 1- Variable expense ratio
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Cost Volume Profit
Primary Purpose is to estimate how profits are affected by the following five factors: 1. Selling prices. 2. Sales volume. 3. Unit variable costs. 4. Total fixed costs. 5. Mix of Products sold.
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CVP calculations, managers typically adopt the following assumptions with respect to these factors:
1. Selling price is constant. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit. The fixed element is constant in total over the entire relevant range. 3. In multiproduct companies, the mix of products sold remains constant.
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Drawback of CVP
Greatest danger lies in relying on simple CVP analysis when a manager is contemplating a large change in sales volume that lies outside the relevant range. However, even in these situations the CVP model can be adjusted to take into account anticipated changes in selling prices, variable costs per unit, total fixed costs, and the sales mix that arise when the estimated sales volume falls outside the relevant range.
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Contribution I/S
Sales Variable expenses Contribution Margin Fixed expenses Net Operating Income -expressed on a per unit basis and in dollars Note: Contribution I/S used by managers only
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Contribution Margin
contribution margin= sales revenue - variable expenses -Amount available to cover fixed expenses and to provide profits for the period. -If the Contribution Margin is unable to cover the fixed expenses then a loss occurs for the period
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CVP Relationships in Equation Form
- The contribution format income statement can be expressed in equation form as follows: Profit = (sales - variable expenses) - fixed expenses we use the term profit to stand for net operating income in equations. When a company has only a single product, as at Acoustic Concepts, we can further refine the equation as follows: Sales = Selling price per unit X Quantity sold Variable expenses = Variable expenses per unit X Quantity sold Profit= ( P X Q - V XQ) - Fixed Expenses It is often useful to express the simple profit equation in terms of the unit contribution margin (Unit CM) as follows: Unit CM = selling price per unit -variable expenses per unit Profit = (P-V) X Q - Fixed Expenses Profit = Unit CM X Q - Fixed Expenses
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Budget
A detailed plan for the future that is usually expressed in formal quantitative terms.
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Cash budget
A detailed plan showing how cash resources will be acquired and used over a specific time period. (
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Continuous budget
A 12-month budget that rolls forward one month as the current month is completed.
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Control
The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change.
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Direct labor budget
A detailed plan that shows the direct labor-hours required to fulfill the production budget.
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Direct materials budget
A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.
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Ending finished goods inventory budget
A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet.
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A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.
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Master budget
A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet.
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Merchandise purchases budget
A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.
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Planning
Developing goals and preparing budgets to achieve those goals.
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Production budget
A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs.
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Responsibility accounting
A system of accountability in which managers are held responsible for those items of revenue and cost—and only those items—over which they can exert significant control. The managers are held responsible for differences between budgeted and actual results.
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Sales budget
A detailed schedule showing expected sales expressed in both dollars and units.
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self imposed budget