breakeven point the point at which a firm shows neither a profit or a loss breakeven point the point at which a firm just covers all of its costs breakeven point the level of sales at which profit is zero incremental analysis the change that occurs when revenue and cost change incremental analysis an analytical approach that focuses only on those costs and revenues that change as a result of a decision incremental analysis simpler and more direct than preparing a new income statement Incremental Contribution Margin (change in sales x CM ratio) - Incremental Expense (change in expense) = Change in Net Operating Income process of incremental analysis contribution margin the amount remaining from sales revenue after variable expenses have been deducted contribution margin the amount available to cover fixed expenses and then to provide profits for the period contribution margin most useful in decisions involving short-run changes in volume Contribution Margin = Sales - Variable Expenses formula for the contribution margin contribution margin ratio the contribution margin as a percentage of sales contribution margin divided by sales formula for the contribution margin ratio unit contribution margin divided by unit selling price

formula for the contribution margin ratio per unit contribution margin ratio shows how the contribution margin will be affected by a change in total sales sales per unit - variable expenses per unit formula for the contribution margin per unit the break-even point in unit sales a special case of target profit analysis where the target profit is zero unit sales to break even = fixed expenses divided by unit contribution margin formula to calculate the break-even point in unit sales dollar sales to break even = fixed expenses divided by the contribution margin ratio formula to calculate the break-even point in dollars margin of safety the excess of budgeted actual sales dollars over the break even volume of sales dollars margin of safety the amount by which sales can drop before losses are incurred the lower the risk of not breaking even and incurring a loss the higher the margin of safety margin of safety in dollars = total budgeted (or actual) sales - break-even sales formula for calculating the margin of safety in dollars margin of safety percentage = margin of safety in dollars divided by the total budgeted (or actual) sales in dollars formula for calculating the margin of safety percentage operating leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales operating leverage acts as a multiplier; if it is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income degree of operating leverage = contribution margin divided by net operating income formula for calculating degree of operating leverage degree of operating leverage a measure, at any given level of sales, of how a percentage change in sales volume will affect profits operating leverage greatest at sales levels near the break-even point and decreases as sales and profits rise contribution margin per unit = sales per unit - variable expenses per unit problem: calculate the unit contribution margin based on an income statement segmented income statement useful for analyzing the profitability of segments, making decisions, and measuring the performance of segment managers sales - variable expenses = contribution margin - traceable fixed expenses = divisional segment margin - common fixed expenses = net operating income format of the segmented income statement internally in the contribution format how are segmented income statements prepared? segment margin represents the margin available after a segment has covered all of its own costs segment margin

the best gauge of the long-run profitability of a segment segment margin most useful in major decisions that affect capacity traceable fixed costs a fixed cost that is incurred because of the existence of the segment - if the segment had never existed, the fixed cost would have never occurred traceable fixed costs can be traced directly to a segment common fixed expense a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment segment margin = segment's contribution margin - segment's traceable fixed costs formula to calculate segment margin total expenses - traceable fixed expenses = common fixed expenses formula to calculate common fixed expenses communicate management's plans throughout the organization; force managers to think about and plan for the future; provides a means of allocating resources to the parts of the organization that can use them most effectively; can uncover potential bottlenecks before they occur; coordinate the activities of the entire organization by integrating the plans of the various parts; define goals and objectives that can serve as benchmarks for evaluating subsequent performance advantages of budgeting self-imposed budget also called a participative budget

self-imposed budget a budget that is prepared with the full cooperation and participation of managers at all levels self-imposed budget man managers believe that it is the most effective method of budget preparation all individuals feel like members of the team; often more accurate and reliable than estimates made by top managers; increases motivation and commitment; an unattainable budget is no longer an excuse advantages of self-imposed budgets budgetary slack managers will have a natural tendency to submit a budget tha is easy to attain all levels in the organization should work together to produce the budgets how to avoid budgetary slack budgetary slack a limitation of the self-imposed budget continuous budget also called a perpetual budget continuous budget a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed continuous budget one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close production budget lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory

budgeted unit sales + desired ending inventory of finished goods = total needs - beginning inventory of finished goods = required production in cases format of the production budget desired inventory of finished goods comes from the percentage given of the next quarter or month beginning inventory of finished goods comes from the ending inventory of the previous period the last quarter or month final desired ending inventory is the same as that of the first quarter or month the final beginning inventory is the same as that of master budget consists of a number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals master budget culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet sales budget everything on the master budget depends on the sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, ending finished goods inventory budget, selling and administrative expense budget, cash budget, budgeted income statement, budgeted balance sheet parts of the master budget schedule of expected cash collections budgeted cash collections from sales for the period use the percentages given to determine when cash will be collected

okay look at paper for format of schedule of expected cash collections quantity variances - production manager; price variances - purchasing manager who is responsible for variances? variances discrepancies between standard and actual amounts price variance a variance that is computed by taking the difference the actual price and the standard price and multiplying the result by the actual quantity of the output quantity variance a variance that is computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the result by the standard price of the input labor rate variance the difference between the actual hourly labor rate and the standard rate, multiplied by the number of hours worked during the period labor efficiency variance the difference between the actual hours taken to complete a task and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate materials price variance the difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased materials quantity variance the difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit of material variable overhead efficiency variance

the difference between the actual level of activity and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate variable overhead rate variance the difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period Actual Quantity x (Actual Price - Standard Price) equation of the materials price variance unfavorable actual > standard; negative number using the equation favorable actual < standard; positive number using the equation unfavorable materials price variance the actual purchase price exceeds the standard purchase price (Actual Hours - Standard Hours) x Standard Rate labor efficiency variance equation Actual Hours x (Actual Rate - Standard Rate) labor rate variance equation