Final Exam Preparation Hints

Identifying Strategic Implications in Accounting Data

ACCT 6273
Online MBA Program
1. Understand the definition of variable cost and fixed cost and understand how each
behaves when activity varies.
2. Be able to recognize and reason through what costs are variable costs and what costs
are fixed costs.
3. Know the difference between a Contribution Margin Income Statement and a Gross
Margin (or Absorption) Income Statement.
The Contribution Margin Income Statement separates expenses into variable
expenses and fixed expenses.
The Gross Margin (or Absorption) Income Statement separates expenses into Cost
of Goods Sold (or product costs) and S, G, & A (or period costs).
a) Be able to prepare each:
Contribution Margin
Income Statement

Gross Margin
Income Statement

Sales

Sales
Less: Variable Costs Less: Cost of
= Contribution Margin

Goods Sold
= Gross Margin
Less: Fixed Costs
= Net Income

Less: S, G, & A
= Net Income

b) Be able to use the Contribution Margin Income Statement to quickly assess the
effects of changes in volume.
4. Know the total cost formula and the total profit formula, and be able to use them.
TC = (VC/unit x N) + FC
NI = (SP/unit x N) (VC/unit x N) FC = (CM/unit x N) FC

5. Know what breakeven is: NI = 0

a) Be able to compute breakeven (BE) in units.
BE units = FC/CM per unit = FC/(P-V)
b) Be able to compute breakeven in sales dollars.
BE sales$ = BE units X SP/unit
c) Be able to assess the effect on breakeven of increases or decreases in selling price,
increases or decreases in variable costs, and increases or decreases in fixed costs.
6. Be able to compute the number of units (or sales dollars) required to produce any
given amount of profit.
N = (FC + NI)/CM per unit = (FC + NI)/(P V)
7. Be able to calculate a Traditional or Plantwide Overhead Rate. The allocation base for
a Traditional or Plantwide Overhead Rate is generally Direct Labor Hours, Direct
Labor Dollars, or Machine Hours.
8. Be able to compute product costs using a Traditional costing system to allocate all
overhead costs to products (or services or cost objects) using a Traditional or
Plantwide Overhead Rate.
9. Be able to compute product costs using an Activity-Based Cost (ABC) system.
10. Be able to interpret and analyze product costs calculated using a Traditional costing
system, and an Activity-Based Cost system. Be able to draw managerial conclusions
and make managerial decisions from your analysis.
11. Be able to distinguish between flexible budgets and master (static) budgets.
12. Be able to prepare flexible budgets, and to compute flexible budget variances.
Flexible budget variance = Flexible Actual
13. Be able to interpret related master (static) budgets, flexible budgets, and actuals.
Understand how you as a manager might use flexible budgets to evaluate a businesss
performance.
14. Be able to compute and interpret price and usage (or rate and efficiency) variances.
Price/Rate Variance = (SP AP) X AQ
Usage/Efficiency Variance = (SQ AQ) X SP

15. Be able to compute and interpret overhead spending and volume variances.
Overhead Spending Variance = Flexible Actual
Overhead Volume Variance = Absorbed Flexible
16. Know that a non-zero variance is incomplete with an F or U, and label each
variance correctly.
17. Be able to develop effective managerial hypotheses about the causes of the variances.
18. Be able to use all of the above analyses to draw managerial conclusions and make
managerial decisions.

Key to abbreviations:
TC
VC
N
FC
NI
SP
CM
BE
SP
SQ
AP
AQ

Total Cost
Variable Cost per unit
Number of units
Fixed Cost
Net Income (Profit)
Selling Price per unit
Contribution Margin
Breakeven
Standard Price
Standard Quantity
Actual Price
Actual Quantity