Chapter 16 Accounting Information for Management Decisions

Terms:

Total Costs:  All costs for a specific period of time.

Unit Cost:  An amount spent for one of a specific product or service.

Variable Cost:  Total costs which change in direct proportion to a change in the number of units.

Fixed Cost:  Total costs that remain constant regardless of change in business activity.

Contribution Margin:  Income determined by subtracting all variable costs from net sales.

Breakeven Point:  The amount of sales at which net sales is exactly the same as total costs.

Sales Mix:  Relative distribution of sales among various products.

Notes:

Financial statement information is used by managers to guide and direct various aspects of a business.

To calculate unit cost:

        Total cost divided by units sold/purchased equals per  unit cost.

To calculate contribution margin:

        CM = Net Sales - Variable Costs.

        TCM= divided by units sold - CM/Unit

If a manager is to make decisions that provides a favorable net income for a business two important kinds of information are needed.  1.  The amount of merchandise or services a company must sell. 2.  The factors that contribute most to net income.

To calculate the Breakeven Point by sales dollars:

   1.  Contribution Margin divided by Net Sales = Contribution Margin Rate.

   2.  Total Fixed Costs divided CMR = Sales Dollar Breakeven Point.

To calculate the Breakeven Point in units:

   1.  Unit Sales Price - Variable Cost/Unit = CM/Unit

   2.  Total Fixed Costs/CM/Unit - Unit Sales Breakeven Point.

   3.  Unit Sales Breakeven x Unit Sales Prices = Sales Dollar Breakeven Point.

To verify your breakeven points compose a breakeven income statement.

To calculate and desired level of income from your business:

   1.  TFC + Planned Net Income = Required CM

   2.  Required CM divided by CMR = Sales Dollars

Sales Mix Calculations:

   1.  Product Sales divided by Net Sales = Sales Mix

   2.  CM divided by Net Sales = CMR

   3.  TFC + Planned Net Income = Required CM

         Required CM divided CMR - Total Sales Dollars

   4.  Sales Mix of each item multiplied by Total Sales Dollars.

   5.  Product Sales Dollars divided by Unit Sales Price = Product Unit Sales.

Assignments:

Joint Projects:  Problem 16-1, 16-2, 16-3, 16-4, 16-5, 16-6,

Individual Projects: Problem 16-M, 16-C, Questions for Individual Study,Case Studies.