Accn Notes

Topics: Costs, Variable cost, Operating leverage Pages: 6 (931 words) Published: March 11, 2013
Internal Reporting //ACCN Notes

Class 1

Internal Reporting
Only for people inside the firm, not shared with public or even shareholders
All types of businesses, profit and nonprofit

Internal Reports are used to look ahead:
Planning
Establishing goals and objectives
Directing
Coordinating activities and motivating employees
Controlling
Keeping activities on track, are they being met, how to get back on track

Types of Costs
Product- all costs to purchase or manufacture
Merchandiser: all costs for getting goods ready to sell
Manufacturer: same as above + direct materials, direct labor, mnf. Overhead Period costs- arise from the passage of time, expensed as incurred ex. Salaries outside of product manufacturing.

Manufacturing costs
Direct or raw materials, indirect materials: denim vs. thread in making jeans Direct or touch labor: employees that sit and sew the pieces of fabric
Indirect labor: those that clean, secure and supervise the mnf process Manufacturing overhead
Any item that is necessary to produce that product including insurance property taxes, depreciation etc.

Definitions
Prime costs: direct materials and direct labor
Conversion costs: direct labor and manufacturing overhead, required to convert the raw materials into final product

Direct vs. indirect costs: Depends on point of view, what are you looking at. The former can be easily traced to a specific and indirect cannot.

Opportunity costs: cost of giving up alternatives, not measured by acct systems, may change a decision

Sunk costs: costs already incurred, cannot be changed by any decision

COST behavior, fixed vs. variable
“in the long term, all costs are variable”

VC: increase as number of units increases, based on level of activity FC: remain same over range of activity, “relevant range” over time this changes, committed or discretionary, the latter wont effect the production capacity.

Step or “semi-variable” costs: change in response to large changes in activity

Mixed costs: both VC and FC, an example would be electricity, should be separated into appx of each Methods to separate: high/low for activity (back of the envelope) , regression analysis Shoe store example, subtract low from high and divide by difference in activity, May used below.

Total costs = fixed costs + variable costs
180,000 = fixed costs + (10,000 u x $15/unit)
fixed costs= $180,000 – $150,000= $30,000/month

Surfboard example
* Garage cost $6,000
* $30 materials per board
* $35 labor to build surfboard
* Machinery rent $200/month
* Advertising $100/month
* Commission $20/sale
* Selling, manufacturing

FixedVariable/boardSunk
$100 Advertising(discretionary)$20 Commission$6000 Garage $200 Machinery(committed)$35 Labordepreciates
$100 Garage$30 materials

Class 2

CVP cost volume profit analysis
Breakeven
Contribution margin
Operating leverage- examines the degree to which a business uses fixed costs

Revenues {variable costs + fixed costs} = 0
(Selling price/unit)x #unitsVC/unit(#units) +fixed costs = 0 SP/unit- VC/units(#units) = Fixed costs

#units at B/E = Fixed costs/(SP/unit – VC/unit)

breakeven in sales $= can be calculated in two different ways, using FC/CM ratio or using
BE volume multiplied by selling price

Sales Mix, determine if constant or not

Margin of safety: at current level of sales how safe are we, how far can sales fall before zero profit is made. Can be calculated by units, dollars or percentage of sales.

Units: current # units sold – BE units = Margin of safety

Dollars: current sales – BE sales = M S

Percent: current sales – BE sales / current sales = %

Contribution margin income statement for Squirrely Gherl

Revenues (units sold x SP)525,000
Less VC (units sold x VC)175,000
Contribution Margin350,000
Less FC300,000
Net Operating Income50,000

Income Tax Impact
Taxes don’t impact FC,...
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