2071
Test ACG #2 Review Sheet (chapters 6 thru 9)
Note the information provided is intended to be a list of key topics potentially included on the test.
More detailed knowledge of the topics listed, including the capability of working problems, is
required to answer many of the questions. There may also be other information not included on
this review sheet that could be tested.
52 questions (10 T/F, 42 M/C) - 150 minutes maximum time allowed, please keep track of time.
Allowed 3x5 handwritten note card, non-programmable calculator
--------------------------------------------------------------------------------------------------------------Chapter 6 (Ex 6-23, 24, 41, 55)
Fixed costs costs that remain the same in total, but change on a per unit bases, with changes in
production volume.
Variable costs costs that remain the same on a per unit basis, but change in total, with changes in
production volume.
Mixed costs costs which have a fixed and variable component
Committed Fixed costs vs. Discretionary fixed costs
Graphs of each type of cost; fixed, variable, mixed
Relevant range the normal range of units of production where the fixed and variable relationship
holds.
Cost Structure proportion of fixed and variable expenses in organization.
Cost equation: Total Costs = [Variable Costs per unit x # of units] + Fixed Costs
Regression analysis a statistical method used to estimate fixed and variable components of a mixed
cost.
High-low method another method used to estimate fixed and variable components of a mixed cost.
Step 1 - estimate variable cost per unit change in cost / change in volume
Step 2 estimate fixed cost use cost equation
Contribution Margin Format I/S Sales Variable Expenses = CM Fixed Expenses = Profit
Sales = units x sales price, Variable expenses = units x variable cost per unit, Fixed expenses = total
fixed expenses
Chapter 7 (7-1, 2, 3, 4, 51, 59)
Total Revenue = Sales Price per unit x number of units sold
Total Variable Costs = Variable cost per unit x number of units sold
Total Revenue Total Variable Costs = Contribution Margin
Sales Price per unit Variable Costs per unit = Contribution Margin per unit
Total Revenue Total Variable Costs Total Fixed Costs = Profit/(Loss)
Break Even Analysis:
Break Even in Units = Total Fixed Costs / Contribution Margin per unit
Break Even in $ = Total Fixed Costs / Contribution Margin Ratio (%)
Contribution Margin Ratio = Contribution Margin / Sales
Target Profit Analysis:
Sales Volume (units) = Total Fixed Costs + Target Profit / Contribution Margin per unit
Sales ($) = Total Fixed Costs + Target Profit / Contribution Margin Ratio
Operating Leverage high fixed costs and low variable costs equates to high operating leverage
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High Operating Leverage change in sales will impact net operating income significantly
Operating Leverage Factor = Contribution Margin / Net Income
Percentage change in sales x operating leverage factor = % change in net operating income
Margin of Safety = Actual or Budgeted Sales $ less Break-Even Sales $, amount that sales can
decrease before company suffers losses.
Increase or decrease in sales $ x contribution margin ratio = increase or decrease in net income
(assuming no change to fixed costs)
Increase or decrease sales in units x contribution margin per unit = increase or decrease in net income
(assuming no change to fixed costs)
Break-Even Multiple Products use total contribution margin ratio to find total break even in sales,
and then allocate the break-even sales to each product based on the sales mix.
Chapter 8 (8-8, 17, 19, 24, handout)
Decision Making Special Orders, Pricing methods, Drop, Make or Buy, Product Mix, Sell or Process
Further.
Key is to review relevant costs and revenues. These are costs or revenues that differ between the
alternative choices. Also must look at non-financial information
Special Orders:
Relevant costs are outlay costs + any opportunity costs. Fixed costs are normally sunk and
therefore not relevant.
Will increase profits when price accepted is > variable costs + opportunity costs
Qualitative Factors effecting special order decisions include effect on other customers, effect on
competitor pricing (price wars), etc.
Pricing could be done using Target Costing where the cost is backed into after determining what
product can be sold for and an acceptable profit. Cost-Plus Pricing determines price after calculating
cost of product.
Constraints are limited resources restricting how much of a product can be produced and sold. Should
maximize production and sales of product with highest CM per unit of constraint.
Decision to Drop a Product:
Should drop product when avoidable costs are greater than revenue lost.
Make or Buy Decisions:
If avoidable costs when not making are greater than cost to buy, than company should buy.
Sell or Process Further Are the incremental revenues received greater than the incremental costs
incurred to process further. If yes, then process further.
Chapter 9 (9-11, 12, 22, 28, handout)
Budgets plan or forecast regarding acquisition and uses of resources. Budgets are used in planning,
directing, and control activities.
Master Budget Comprehensive set of all budgets for operations
Sales Budget prepare first as base from which other budgets are generated.
Production Budget (Units)
Units Needed from Sales Forecast + Projected Ending Inventory Projected Beginning Inventory =
Production Required in units
Purchases (Materials) Budget
Production Required in units x Material per Unit + Projected Ending Inventory of Material
Projected Beginning Inventory of Material = Purchases of material required (Units)
Purchases or material required in units x Purchase Price per unit = Purchases in $
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Direct Labor Budget
Production Required in units x Direct Labor Hours Per Unit x Direct Labor Rate per Hour
Operating Expense Budget budgets for areas other than manufacturing costs. Note: depreciation may
be in this budget, it is a non-cash expense.
Cash Budget Cash collections budget and cash payments budget. Pay attention to dates and time
lags.
Responsibility Accounting managers should be measured based on information and activities they
have control over.
Cost Center
Revenue Center
Profit Center
Investment Center
Control Function evaluates performance of company (e.g. are the goals of the company being met?)
Variance Analysis compare actual results with budget
Management by Exception review items which appear out of line, normally do not investigate
small variances
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