Accounting Term 1 Review Key Takeaways Blackheath Manufacturing Company - Theme: variable costs and fixed costs, making

ng decisions about profitability of an order - Takeaways: o Variable costs are constant on a per unit basis, increase on a cumulative basis o Fixed costs decline on a per unit basis, are constant on a cumulative basis o Mixed costs decline on a per unit basis, increase on a cumulative basis o Finding the variable and fixed components of mixed costs (find the slope (change in cost over change in units) and intercept of the equation) o Fixed cost shouldnt be looked at on a per unit basis because fixed cost per unit is only valid at a certain number of units the overall profitability is more important (the dollar contribution times the number of units). It is important to know if the order contributes (SP VC). o When making a short term decision about pricing/ dropping product lines, contribution margin is more important than Price total cost, because fixed costs cant be changed in the short term. o Strict decision rules about accepting or rejecting orders at a certain price should not be used in the presence of significant fixed costs - Formulas: o Contribution margin ($) = Selling Price Variable Cost o Contribution margin (%) = (Selling Price Variable Cost)/ Selling Price Superior Manufacturing Company - Theme: cost behavior (variable and fixed costs), relevant costs, deciding whether to keep or drop a product line. - Key Takeaways: o Manufacturing costs include all costs incurred under the factory roof. Full-costing means assigning all costs incurred under the factory roof to the product so that it can be capitalized appropriately (put on the balance sheet as an asset). o Standard costing = planning/ budgeting by assigning last years (or a historical) cost to items and adjusting for any expected increases or decreases. o In the short term, when fixed costs cannot be changed, variable costs are the key for decisions. o When deciding whether to keep or drop a product line, determine which costs are both direct and/or variable because those are the only ones that would be eliminated by dropping the product line. If the selling price is above the direct, variable costs, the product should be continued in the short term. o Fixed costs per unit are only valid at a certain number of units; the company was using fixed costs per unit and calling them standard costs. They were then multiplying their standard per unit costs by the total number of units sold to find total standard costs. This was a problem because at a lower number of units last year, fixed costs per unit were above what they would have been this year so the total standard cost came out significantly above actual costs even though they hadnt improved profitability.

Sparta Glass Products - Theme: cost behavior (variable and fixed costs), relevant costs, decisions regarding pricing - Key Takeaways: o Cost allocation downside of having profit centers is that departments/ divisions only want to do what is in their best interest. o Dont take fixed costs and allocate them as variable costs. A system of cost allocation that treats fixed costs (such as corporate overhead and SG&A) as variable, biases the company against higher volumes and/ or growth. It makes higher volumes appear to have more fixed costs. o When deciding between alternatives about prices/ units, look at the total contribution (SP VC)* Units and decide based on which option contributes more. o Contribution margin per unit is important but in this case we needed to look at total contribution because we were also making a decision that impacted units sold. o We care about Fixed costs when: Should we be in this business? Can the variable costs/ contribution cover the fixed costs? Only used fixed costs in total for calculating profit margins, keep it relative (to the amount of product) if breaking down into a per unit basis.

Shun Electronics: - Theme: cost system design, overhead allocation product costing - Key Takeaways: o Classic example of traditional costing. In both cases (before and after the change in allocation bases) the company was allocating manufacturing overhead on the basis of direct labor (and sometimes material). o Overhead cost allocation: have to choose cost pools (how many groupings you want for overhead before you push it out to the product) and the basis for overhead allocation (labor is often considered to be a metric for volume. It is a traditional basis for allocation) o Overhead (% per unit): expected overhead amount / expected driver base. o In this case, Shun electronics changed their cost pools to follow the production process (process distinctiveness) and made separate cost pools out of each of the different areas the products went. Then they allocated on the basis of direct labor. o When we have shared infrastructure resources, they need to be allocated out to the product. Dont want one product to subsidize another and if we do, we want to know how much. Wilkerson Company: - Theme: Activity based costing - Key Takeaways: o Before: company was using a simple, traditional allocation system with 1 cost pool and 1 basis for allocation. o Activity based costing: allocating shared manufacturing costs to products based on the activities that are performed on them. This involves splitting overhead up into different cost pools that are driven by certain activities (in this case, machine-related expenses, setup labor are considered the different cost pools) and allocating each cost pool to each product on the basis of how much it uses each activity. To do this, we need find a

driver for each cost activity and calculate the ratio to be applied as a percentage of the whole. For instance if machine hours is chosen as the driver of machine related expenses, we calculate the percentage of total machine hours used by the product and then take that percent of the whole machine-related expenses.

Charleys Family Steakhouse - Themes: planning and budgeting - Key Takeaways: o Why plan/ budget: allows us to think realistically about what might happen, how to react if certain situations come up. o Where do we start with planning and budgeting: have to start with sales, because much of our variable costs were dependent on sales? Food costs were dependent on sales and some of the other operating/ advertising expenses were driven by sales. Labor driver was the number of customers, $.48/ customer. Gibersons Glass Studio - Themes: cost behavior, determining product mix in the presence of constrained resources - Key Takeaways: o In the presence of constrained resources maximize the contribution per constrained resource; choose the product that maximizes the contribution per constrained resource. In this case he wants to maximize revenue per unit of his hot time so he needs to charge per unit of his hot time. He needs to charge more than his costs/ unit of hot time. o In this situation, there was a constraint (hot time) that made all of his traditionally variable costs become fixed. If there were not a constraint he could produce more and some of his costs would become variable. o Product and service costing are very valuable but you have to look the cost structure before doing any analysis on either. Since all costs were fixed, we didnt have to do any allocation because no matter how you allocate, all costs would be the same in the end. o Make an income statement and look at the nature of the costs. He cant cost cut so he needs to grow the top line. The Horizon Insurance Agency - Themes: Outsourcing , Cash Flow - Key Takeaways: o In this case we were faced with an outsourcing decision. o We established cash flows for both scenarios ( Outsourcing vs. keeping Department inside ) o We computed the difference in cash flow between the two and calculated its net present value. o Establishing cash flow on the accounting basis or on the accrual basis ,both led to the same end result

Maverick Lodging - Themes: Balanced Scorecard - Key Takeaways: o Focusing solely on financial metrics to judge a companys, divisions or individuals performance may lead to short-term benefits at the expense of long-term strategic objectives. o A balanced scorecard helps companies focus on metrics that are not just related to financial performance, but also incorporates non-financial metrics that will help the company achieve its strategic goals. o In this case the company has added comprehensive audit performance, customer satisfaction and employee retention as factors that impact a hotel managers bonus. In theory this will help hotel managers focus on more than just short-term profits. o Financial metrics tend to be backwards looks and a balanced scorecard approach can help a company focus on leading indicators. Leading indicators are metrics that indicate performance will improve in the future. o There are four processes necessary in creating a balanced score card: 1. Translating the vision, taking the companies vision and strategy and turning it in to a set of objectives and measures 2. Communicating and linking, communicating the companys vision throughout the organization and linking each department to objectives that support the overall strategy. 3. Business Planning, integrate the companys business and financial plans in order to allocate resources in a manner that will help the company meet its strategic goals. 4. Feedback and learning, the company will be able to use the balanced scorecard to measure its departments performance on more than just financial performance and adjust its goals as necessary.