Download Chapter 12 Study Outline

Accounting: What the
Numbers Mean
Study Outlines and
Overhead Masters
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.
COST CLASSIFICATIONS
•
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
KEY ASSUMPTIONS
•
RELEVANT RANGE
•
LINEARITY
g
FIXED COST
COST FORMULA
KEY POINT
• A COST FORMULA DESCRIBES THE
EXPECTED TOTAL COST FOR ANY VOLUME
OF ACTIVITY, USING COST BEHAVIOR
INFORMATION.
KEY RELATIONSHIP
• TOTAL
COST
=
=
FIXED +
COST
VARIABLE
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
REVENUES
- VARIABLE EXPENSES
CONTRIBUTION MARGIN
- FIXED EXPENSES
OPERATING INCOME
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
REVENUE
PER UNIT X VOLUME = TOTAL %
$
1.
$
100%
VARIABLE EXP.
$
1.
CONT. MARGIN
$
1.
X
2.
=
2.
FIXED EXPENSES
OPERATING INCOME
3.
$
3.
KEY IDEAS
•
THE PREFERRED ROUTE THROUGH THE MODEL IS:
1.
TO ENTER PER UNIT REVENUE AND VARIABLE
EXPENSES TO GET UNIT CONTRIBUTION MARGIN.
2.
THEN MULTIPLY UNIT CONTRIBUTION MARGIN
BY VOLUME (QUANTITY SOLD) TO GET TOTAL
CONTRIBUTION MARGIN.
3.
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.