Cost Accounting and Budgeting for Business Success

Cost Accounting and Budgeting Fundamentals

• FOH Allocation: Single Plantwide, Departmental, and Activity-Based Rates
• Advantages of Departmental FOH Rates: It doesn't assign other costs such as depreciation.
• Characteristics of Unit, Batch, Facility, and Product Level
• Activity-Based Costing and the Importance of Activity Drivers
• Importance of ABC Costing
• Importance of Matching Strategic Planning with Pricing, Market Penetration, and Expansion
• Contribution Margin Formula: Sales - Variable Costs (VC)
• Fixed Cost and Variable Cost Behavior
• Break-Even Point Concept and Formula: Level of sales at which contribution margin matches fixed expenses, expressed in dollars.
• Direct Labor (DL) Cost per Unit: Given two different levels of production
• Differences Between Variable and Absorption Costing: Absorption defers the recognition of fixed expenses in inventory until units are sold.
• Behavior Using Variable Costing and Absorption Costing When Units are Produced and Sold
• How Managers Can Manipulate Financials with Absorption Costing
• Benefits of Absorption Costing
• Environmental Profit and Loss: Look in Wikipedia
• Importance of Budgets as a Control Mechanism
• Usage of Budgets: Ways to see opportunities and problems for correction
• Budget Process Within the Company: Employees, attainable variances
• Continuous Budgeting: 12-months out
• Master Budget Preparation: Start with sales, cost of goods sold (COGS), production, general and administrative (G&A), and finalize with cash.

Problem I: Master Air Conditioning Inc. Financial Forecast (20 Points)

Master Air Conditioning Inc. is trying to determine some of their most important financial components to forecast their financial performance for next year, 2019. Practice with this example:

Data:

1. Fixed administrative expenses are = $250,000 annually
2. Average air conditioning installation is $3,500 with a variable cost of 50%
3. Average sales per service job is $1,000 with a variable cost of 25%
4. The owner needs to achieve a pretax income of $125,000
5. The average income tax rate is 25%
6. Sales mix is 50% of each AC installation and service sales departments

Based on the information above, calculate:

1. The contribution margin dollars for each department
2. The contribution margin for the mix
3. The break-even point level of annual sales for the mix in dollars and units by each department
4. The target profit in annual sales for the mix (both in dollars and in activity units)
5. Proof that the results are viable based on the break-even and target profit tests below to the right
6. The net after-tax profit for the company

Extra Credit Exercise I: Cost and Budgeting Concepts (10 Points)

Match the concept with the description:

1. Variable Cost
2. Fixed Cost
3. Mixed Cost
4. Absorption Costing
5. Sales Mix
6. Contribution Margin
7. Target Profit
8. Contribution Margin for the Mix
9. Break-Even Point
10. Continuous Budgeting

___ Increases in volume with sales units increase

___ It includes both major types of cost behaviors

___ It is the level of sales that can guarantee net income

___ It is the point at which contribution margin matches fixed expenses

___ It is the process of planning a budget 12 months out (non-stop)

___ It is the difference between sales and variable costs

___ It makes sure that fixed expenses are included in inventory

___ It does not change within the relevant range as a whole

___ It is the difference between sales and variable costs per unit

___ It is the result of the addition of each sales department's contribution margin