Chapter 7: Budget

Chapter 8: CM

If want to achieve a target profit of 2.25

million, how much more sales in units?

At break even, profit=0
2.25 million / 70 = 32142 units to sell more to get more 2.25 profit
In total units plus the previous and the added units
The total sales = units x selling price
Given product A: $800k, product B $1.250 million => A: 39%, B 61%
Prediction of sales needed to reach new profit (allocate sales to each product) j
A: Total sales x 39%
B: total sales x 61% Degree of operating leverage = $198,000
$18,000 =11
b. 11 × 20% = 220% increase in net operating income. In dollars, this increase
would be 220% × $18,000 = $39,600.
Chapter 9 Total fixed overhead = $16.65 x 55,500 units = $924,075. Of this, only 30% is
avoidable (or relevant); therefore, the relevant portion of the fixed cost =
$277,223. At a volume of 48,000 units, the per-unit cost would be approximately

$5.78 ($277,223 ÷ 48,000).

None of the fixed overhead

costs can be avoided if the parts
are purchased.
Sixty percent of the overhead is
allocated common cost which will
continue; the
 remaining book value of the special equipment is a sunk cost; finally,

supervisory salaries
will also continue
and are not
avoidable costs.
Chapter 11

Chapter 12 (margin: %, ROI %)

Chapter 7
Zero-based budgeting is an alternate approach to budgeting. Particularly used in governmental and not-for-profit sectors. Managers are required to justify all budgeted expenditures, not just changes from the previous year.
Sales budget: Detailed schedule showing expected sales for the coming periods expressed in units and dollars.
CHAPTER 8:
Costs are grouped according to cost behaviour: •costs that change in response to changes in the volume of activity (variable costs)•costs that are fixed with respect to the change in the activity driver (fixed costs)
Cost drivers are •production activity for variable product costs•sales level for the selling and general and administrative costs
Product costs include only the variable cost elements: direct materials, direct labour, and variable manufacturing overhead.
Fixed manufacturing cost is expensed as a period cost without being assigned to the products. The cost of the inventory of products will carry only the variable cost of manufacturing.
Margin is calculated from sales revenue after charging all of the variable costs against revenue. The result is called the contribution margin.
Fixed costs are deducted from the contribution margin to determine the net operating income.
The net operating income from the contribution margin approach need not equal the net operating income from the absorption costing approach.
Costs are grouped by function: •manufacturing •nonmanufacturing
Product costs include all manufacturing costs: variable manufacturing cost elements plus the fixed cost per unit. Fixed costs must be converted to a per-unit basis to assign these costs to units in production.
Units in inventory will carry the full cost of manufacturing (i.e., variable as well as fixed cost per unit). Margin is calculated from sales revenue after deducting the cost of goods sold. The result is called gross margin.
The key is that selling and administrative costs are not deducted when computing the gross margin. Selling and administrative costs are deducted from gross margin to determine the absorption costing operating
income. The net operating income from the contribution margin approach need not equal the net operating income from the absorption costing approach.
The contribution margin income statement can be used to see how profits will change when different operating decisions are made. It is the ideal tool to use for decision making and for internal reporting on
profitability analysis. The absorption costing format is ideal for external financial reporting where the goal is to record the costs and expenses and report them to the company’s stakeholders.
Absorption Costing: all product costs (both fixed and variable) are assigned to products. Both the COGM and COGS will consist of both fixed and variable costs of manufacturing
Variable Costing: Only manufacturing costs that vary with output are treated as product costs (DM, DL & variable MOH) Both the COGM and COGS will consist of only variable costs of manufacturing.
Fixed manufacturing costs are treated as period costs and expensed during the accounting period.
CHAPTER 9: A relevant cost is a cost that differs in total between alternatives.. The difference in costs between the two alternatives is known as the differential cost (or incremental cost)
Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant costs. Relevant cost are future cost differ between alternatives
Unavoidable costs are never relevant and include:
Sunk costs: a cost that has already been incurred and that cannot be avoided regardless of what a manager decides to do, not relevant to decision-making
Future costs that do not differ between the alternatives. Most costs (and benefits) do not differ between alternatives. This allows you to focus on the few things that do matter
In every decision you have to examine the data and isolate the relevant costs Costs that are relevant in one situation are not always relevant in another situation You require different costs for different purposes this
is a basic concept in managerial accounting Why should a company keep a business segment when it is showing a loss? The answer lies in the way common fixed costs are allocated to the product lines as
allocations can make a segment look less profitable than it really is. A common fixed cost supports the operations of more than one segment of an organization and is not avoidable in whole or in party by
eliminating any one segment.
The benefits that are foregone as a result of pursuing some course of action. Opportunity costs are not actual dollar outlays and are not recorded in the accounts of an organization, are relevant cost
TARGET COST: Provides an alternative, market-based approach to pricing new products. Target Cost = estimated selling price – company’s required profit margin.
Advantages over the cost plus approach: A product is not made unless the company is reasonably confident of an adequate profit being achieved Instills a much higher level of cost-consciousness
CONSTRAINTS: Produce only what can be sold At the bottleneck itself:Improve the process, Add overtime or another shift, Hire new workers or acquired more machines, Subcontract production
Eliminate waste, Streamline production process
JOINT APPROACH : In some industries, a number of end products are produced from a single raw material input, The raw material goes through processing and at the ‘split off point’, various products, called joint
products, are identifie, The costs incurred up to the split-off point are called joint costs, These joint costs are always irrelevant in decisions concerning what to do from the split off point forward
Chapter 11
The standard cost of a resource is the cost of the input required for a single performance of an activity or to make one unit of output. The standard cost of the single performance of an activity or a single unit of
output made will be the sum of the standard costs of every input necessary to perform the activity or make one unit of output.
Standard price per unit (SP): Final delivered cost of the materials, net of any discounts Standard quantity per unit (SQI): Use product design specifications
Standard rate per hour (SP): Use wage surveys and labour contracts Standard hours per unit: Use time and motion studies for each labour operation
Rate Standards: The rate is the variable portion of the predetermined overhead rate. Activity Standards: The activity is the base used to calculate the predetermined overhead.
A static budget is a budget developed for a single planned activity level. It will be prepared before the start of the operating year.
A standard cost variance is the amount by which an actual cost differs from the standard cost.
Standard Costs are Predetermined, Used for planning labour, material and overhead requirements, Benchmarks for measuring performance, Used to simplify the
accounting system
Flexible Budgets: Show revenues and expenses that should have occurred at the actual level of activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or
lack of cost control. Improve performance evaluation.
Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range.
Material Price Variance: should be the responsibility of the individual who has the decision rights over the price (i.e. purchasing manager), and it should be calculated when the purchasing function has completed its
responsibilities.
Quantity Variances: it is generally the responsibility of the production department to see that materials usage is kept in line with standards, and it should be calculated when materials are put into [Link]
in the solution below that the materials price variance is computed on the entire amount of materials purchased, whereas the materials quantity variance is computed only on the amount of materials used in
production. It is important [Link] that the total variance cannot be computed in this situation, since the amount of materials purchased (30,000 kilograms) differs from the amount of materials usedin production
(24,600 kilograms).