English for management accounting

Job-order costing Glossary No Terms Meaning 1 Allocation base A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects 3 Bill of m

Managerial Accounting

Topic 1 Job-order costing

Glossary

No Terms Meaning

1 Allocation base A measure of activity such as direct labor-hours or machine-hours

that is used to assign costs to cost objects

3 Bill of materials A document that shows the quantity of each type of direct material

required to make a product

4 Cost driver A factor, such as machine-hours, beds occupied, computer time,

or flight-hours, that causes overhead costs

7 Job cost sheet A form that records the materials, labor, and manufacturing

overhead costs charged to a job

8 Job-order costing A costing system used in situations where many different

products, jobs, or services are produced each period

9 Materials requisition

form

A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials

10 Multiple

predetermined overhead rates

A costing system with multiple overhead cost pools and a different predetermined overhead rate for each cost pool, rather than a single predetermined overhead rate for the entire company

Each production department may be treated as a separate overhead cost pool

11 Normal cost system A costing system in which overhead costs are applied to a job by

multiplying a predetermined overhead rate by the actual amount

of the allocation base incurred by the job

12 Over-applied

overhead

A credit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period

15 Raw materials Any materials that go into the final product

16 A schedule that contains three elements of product

Schedule of cost

of goods manufactured

costs—direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods

17 Schedule of cost of

goods sold

A schedule that contains three elements of product costs—direct materials, direct labor, and manufacturing overhead — and that summarize the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold

18 Time ticket A document that is used to record the amount of time an employee

spends on various activities

19 Under-applied

overhead

A debit balance in the Manufacturing Overhead account that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period

20 Work in process Units of product that are only partially complete and will require

further work before they are ready for sale to the customer

Concepts in Action

1 Read and fill in the blanks with the following words: costing data, project variances,

unique, last-minute, profitable, identified, leverage, budgeted, cost, individually, pricing decisions,

direct labor-hours, completed, success, experience, grand opening, stages, estimated overhead costs,

allocation bases, the percentage

Job Costing on Cowboys Stadium

Over the years, fans of the National Football League have (1) the Dallas

Cowboys as “America’s Team.” Since 2009, however, the team known for winning five Super

Bowls has become just as recognized for its futuristic new home, Stadium in Arlington, Texas

When the Cowboys take the field, understanding each week’s game plan is critical for

(2) But for Manhattan Construction, the company that managed the development

of the $1.2 billion Cowboys Stadium project, understanding costs is just as critical for making

successful (3) , winning contracts, and ensuring that each project is

(4) Each job is estimated (5) because the (6)

end-products, whether a new stadium or an office building, demand different quantities of

Manhattan Construction’s resources

In 2006, the Dallas Cowboys selected Manhattan Construction to lead the construction

of its 73,000 seat, 3 million- square-foot stadium To be (7) in three years, the

stadium design featured two monumental arches spanning about a quarter-mile in length over

the dome, a retractable roof, the largest retractable glass doors in the world (in each end zone),

canted glass exterior walls, 325 private suites, and a 600-ton JumboTron hovering 90 feet

above the field

With only 7% of football fans ever setting foot in a professional stadium, “Our main

competition is the home media center,” Cowboys owner Jerry Jones said in unveiling the

stadium design in 2006 “We wanted to offer a real (8) that you can’t have at

home, but to see it with the technology that you do have at home.”

Generally speaking, the Cowboys Stadium project had five (9) : (1)

conceptualization, (2) design and planning, (3) preconstruction, (4) construction, and (5) finalization and delivery During this 40-month process, Manhattan Construction hired architects and subcontractors, created blueprints, purchased and cleared land, developed the stadium—ranging from excavation to materials testing to construction—built out and finished

interiors, and completed (10) changes before the stadium’s

(11) in mid-2009

While most construction projects have distinct stages, compressed timeframes and scope changes required diligent management by Manhattan Construction Before the first game was played, Manhattan Construction successfully navigated nearly 3,000 change requests and a constantly evolving budget

To ensure proper allocation and accounting of resources, Manhattan Construction

project managers used (12) The system first calculated the (13) of more than 500 line items of direct materials and labor costs It then allocated (14)

(supervisor salaries, rent, materials handling, and so on) to the job using

direct material costs and (15) as (16) Manhattan Construction’s job-costing system allowed managers to track (17) on

a weekly basis Manhattan Construction continually estimated the profitability of the Cowboys

Stadium project based on (18) of work completed, insight gleaned from

previous stadium projects, and revenue earned Managers used the job-costing system to actively manage costs, while the Dallas Cowboys had access to clear, concise, and transparent

(19)

Just like quarterback Tony Romo navigating opposing defenses, Manhattan

Construction was able to (20) its job-costing system to ensure the successful

construction of a stadium as iconic as the blue star on the Cowboys’ helmets

2 Listen and fill in the blanks

Making movie

Big Hollywood movies are fraught with costs of story writers, camera, equipment, studio space, actors, even the right to shoot in a specific location like a famous restaurant has a

cost (1) is critical to the studio’s success because it helps them to (2)

such as what type of films to produce in the future? How much to charge for

DVD? and even figure out if the director is keeping to a film’s budget while it is being made

(3) involves the (4) , (5) and (6) of (7) From these data, companies can determine both (8) and (9) of each product There are two basic types of (10) :

a job-order cost system and a process cost system Under (11) , a

company like a movie studio or an independent self – financed film maker assigns costs to

each job or in this case each movie produced And an (12) of job order costing is that each job or batch has its own (13) , it measures costs for (14) rather than for set time periods

Heidi van Leer knows a lot about film costs She ‘s not only a programmer for the annual Slamdance Film Festival in Park City Ulta but in independent film maker herself Heidi

van Leer:” production costs, especially the studio production they’re really used to spending a

lot of money on everything In an independent film, I usually just try and feed my crew, pay for

my equipment, pay for stock and that’s about it”

Companies that manufacture large volumes of (15) use a

(16) which accumulates product related costs for (17) such

as a quarter or year and assigns them to (18) or processes Job order

costing is more precise in assignment of costs to projects than process costing However

recording the information is (19) Just the same, it isn’t unusual for a

company to use both systems For example Jones Soda practices process costing when

manufacturing soda but uses job order costing when producing small custom orders for its my

Jones program

Studios today must be more budget – conscious than ever that means maintaining a

good job order (20) The flow of costs (21) , (22) and

(23) in job order cost accounting parallels the physical flow of

the materials as they are converted into finished goods While a film is produced, the studio

accumulates (24) through accurate record keeping and assigns those costs

to the account for each film as a (25) When the film is finished, they

transfer the cost to the film to finished good inventory Later, when the film is sold or

distributed, they transfer the costs for that film to (26) So that they can

compare costs to the final revenues of the film to determine their profit

Not all cost can be easily attributed to one section as the flow of material Overhead costs like studio executive office space cannot be assigned to specific jobs on the basis of

(27) incurred Instead companies assign costs to a work - in process into

specific jobs on an estimated basis to the use (28)

In general, company across industries established a predetermined overhead rate

(29) of the year Small companies often use a single company – wide

predetermined overhead rate Large companies often use rates that vary from department to

department The formula for a predetermined overhead rate is as follows:

(30) divided by (31) equals

Predetermined overhead rate Overhead relates to production operations as a whole To know

what the whole is, the logical thing is to wait until the end of the years operation At that time,

the studio know all of its costs for the period As a practical matter though, managers cannot

wait until (32) To price product accurately they need information

about product costs of (33) completed during the year Using a predetermined

overhead rate enables the cost to be determined for the job immediately

Job order costing can be fairly (34) and (35) manufacturing situations But how costs are assigned to a movie is often (36) and may be

subjected to (37) For example in Hollywood studios often negotiate

producer, director and actors payment based on a percentage of a films (38)

As a movie has gone to larger box office grosses it is not uncommon to see the various players

fighting over what they perceive to be their fair share

Filmmaking has changed greatly in the last half century Before 1917 it was nearly impossible to do a film outside of a major studio Technology has changed all that But even

with new distribution channels like cable networks and the internet the overwhelming supply

of material has reduced the price, studio can pay for any individual film

The (39) of film both great and small is dependent upon the practices of a

careful (40)

Summary

Read and fill in the blanks with the following words: predetermined overhead rate,

labor time tickets, job-order costing, over-applied overhead, manufacturing overhead costs,

the actual overhead cost, materials requisition forms, the estimated total manufacturing

overhead cost, finished goods, the estimated total amount of the allocation base direct

labor-hours machine-labor-hours, under-applied, cost of goods sold, work- in process

(1) is used in situations where the organization offers

many different products or services, such as in furniture manufacturing, hospitals, and legal

firms (2) and (3) are used to assign direct

materials and direct labor costs to jobs in a job- order costing system (4)

are assigned to jobs using a (5) All of the costs

are recorded on a job cost sheet The predetermined overhead rate is determined before the

period begins by dividing (6) for the period by

(7) for the period The most frequently

used allocation bases are (8) and (9)

Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual

amount of the allocation base recorded for the job Because the predetermined overhead rate is

based on estimates, (10 ) incurred during a period may be more or

less than the amount of overhead cost applied to production Such a difference is referred to as

(11) or (12) The under-applied or over-applied

overhead for a period can be either closed out to (13) or allocated

between (14) , (15) , and Cost of Goods Sold

When overhead is under-applied, manufacturing overhead costs have been understated and

therefore inventories and/or expenses must be adjusted upwards When overhead is

over-applied, manufacturing overhead costs have been overstated and therefore inventories

and/or expenses must be adjusted downwards

Questions

1 Why aren’t actual manufacturing overhead costs traced to jobs just as direct materials

and direct labor costs are traced to jobs?

2 Explain the four-step process used to compute a predetermined overhead rate

3 What is the purpose of the job cost sheet in a job-order costing system?

4 Explain how a sales order, a production order, a materials requisition form, and a labor

time ticket are involved in producing and costing products

5 Explain why some production costs must be assigned to products through an allocation

process

6 Why do companies use predetermined overhead rates rather than actual manufacturing

overhead costs to apply overhead to jobs?

7 What factors should be considered in selecting a base to be used in computing the predetermined overhead rate?

8 If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?

9 What account is credited when overhead cost is applied to Work in Process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not?

10 What is under-applied overhead? Over-applied overhead? What disposition is made of these amounts at the end of the period?

11 Provide two reasons why overhead might be under-applied in a given year

12 What adjustment is made for under-applied overhead on the schedule of cost of goods sold? What adjustment is made for over-applied overhead?

13 What is a plant-wide overhead rate? Why are multiple overhead rates, rather than a plant - wide overhead rate, used in some companies?

14 What happens to overhead rates based on direct labor when automated equipment replaces direct labor?

Topic 2 Process costing

Glossary

No Terms Meaning

1 Conversion cost Direct labor cost plus manufacturing overhead cost

2 Equivalent units The product of the number of partially completed units and their

percentage of completion with respect to a particular cost Equivalent units are the number of complete whole units that could be obtained from the materials and effort contained in partially completed units

4 FIFO method A process costing method in which equivalent units and unit costs

relate only to work done during the current period

5 Operation costing A hybrid costing system used when products have some common

characteristics and some individual characteristics

6 Process costing A costing method used when essentially homogeneous products are

produced on a continuous basis

1 Read and fill in the blanks with the following words: combination, customer profile, production costs, opportunity, job costing, retail stores, a mass-production, hybrid-costing

system, the conversion cost, customized ,three-step, process costing, digitize

Hybrid Costing for Customized Shoes at Adidas

Adidas has been designing and manufacturing athletic footwear for nearly 90 years

Although shoemakers have long individually crafted shoes for professional athletes like Reggie

Bush of the New Orleans Saints, Adidas took this concept a step further when it initiated the

mi adidas program Mi adidas gives customers the (1) to create shoes to their

exact personal specifications for function, fit, and aesthetics Mi adidas is available in

(2 around the world, and in special mi adidas “Performance Stores” in cities

such as New York, Chicago, and San Francisco

The process works as follows: The customer goes to a mi adidas station, where a

salesperson develops an in-depth (3) , a 3-D computer scanner develops

a scan of the customer’s feet, and the customer selects from among 90 to 100 different styles

and colors for his or her modularly designed shoe During the (4) , 30-minute

high-tech process, mi adidas experts take customers through the “mi fit,” “mi performance,”

and “mi design” phases, resulting in a customized shoe (5) their needs The

resulting data are transferred to an Adidas plant, where small, multiskilled teams produce the

(6) shoe The measuring and fitting process is (7) , but purchasing

your own specially made shoes costs between $40 and $65 on top of the normal retail price,

depending on the style

Historically, costs associated with individually customized products have fallen into the

domain of job costing Adidas, however, uses a (8) — (9) for

the material and customizable components that customers choose and (10) to

account for the conversion costs of production The cost of making each pair of shoes is

calculated by accumulating all (11) and dividing by the number of shoes

made In other words, even though each pair of shoes is different, (12) of

each pair is assumed to be the same

The (13) of customization with certain features of mass production is

called mass customization It is the consequence of being able to (14) information

that individual customers indicate is important to them Various products that companies are

now able to customize within (15) setting (for example,

personal computers, blue jeans, bicycles) still require job costing of materials and considerable

human intervention However, as manufacturing systems become flexible, companies are also

using process costing to account for the standardized conversion costs

2 Listen and fill in the blanks

Jones Soda

In a world where soda brands and flavors can be found almost anywhere and often fill

entire aisle supermarkets , John Soda manages (1) from the competition This

is partly due to quirky label photos which are submitted by customer as well as their fund yet

eccentric line of soda flavors

Mike Spear “ it’s kind of a modern terms but I would say that Jones is an

(2) , today we had 1,2 million photos in our gallery,

online photo gallery, so we really let consumers participate in the brand You know that and

our flavors and colors of our flavors are very unique There is not a lot of green apples sodas

out there, not a lot of fruits sodas out there”

Fans of Jones Soda are so well fanatic that many create video tributes to their favorite flavors or feel themselves trying some of the more challenging flavor There are many

companies today that manufacture sodas, so competition is understandably fears for both

market share and sell space

(3) is a cost accounting method that works ideally for the soda

industry or any industry where costs are assigned to (4) that are

(5) in a continuous fashion (6) on the other

hand is better suited for organizations looking to assign costs to (7) such as

advertising agencies, motion picture companies and law firms (8) between

the two include: both (9) track three manufacturing (10) , the

accumulation of the costs of materials, labor and overhead and (11) is the

same The (12) between a job order cost and a process cost system are : the

number of (13) accounts used, the documents used (14) costs,

the point at which costs are (15) and unit cost computations

As a general rule, manufacturing of soda normally consists of two processes: blending and bottling As the flow of costs indicates companies can add materials labor and

manufacturing overhead in both departments When the blending Department finishes its work

, they transfer the (16) to the bottling department The bottling

department finishes the goods and then transfers (17) Within each

department (18) is performed on (19)

Since Jones Soda uses a wide variety of labels particularly within the my Jones personal

customization program, they have three major processes: blending, bottling and labeling The

use of custom labels has a bit of a story history of Jones Soda When they first incorporated

custom labels ten years ago, the process was quite humble They used an intern and inkjet

printer

Mike Spear:” Literally it was sort of a (20) as business grew we

decided that we had to outsource it and then the process actually goes through a machine

now where the labels are glued in, the liquid goes through a process of applying to the bottles

so it’s not hands on anymore

Vendors such as this can give Jones a (21) because as suppliers they have expertise in specialized areas Alternatively, large (22) like

Coke and Pepsi have the resources and economy of scale to do almost everything internally

Now let’s look at an example where we’ve generalized to the assignment of cost at Jones for the previous month For purposes of this exercise let’s assume Jones does everything

in-house, so there would be three processes First ,we have a work - in process for raw

materials Raw materials used were blending 16,000; bottling 3,000 and labeling 7,000

Factory labor costs were blending 10,000; bottling 4,000 and labeling 6,000 and

manufacturing overhead costs were blending 5,000; bottling 2,000 and labeling 2500 The

company transfers units completed at a cost of $19,000 in the blending department to the

bottling department The bottling department transfers units completed at a cost of $10,000 to

the labeling department and the labeling department transfers units completed at a cost of

$8,000 to finished goods

Companies often use a combination of a process cost and a job order cost system

called (23) This (24) is similar to process costing in

its assumption that (25) are used to manufacture the product The my

Jones program for example with its highly customized small quantity order is a good example

of a manufactured product more suited to a job order cost system

Jones Soda has a model run with the little guy create some changes Cost accounting helps Jones to compete in a cutthroat business against industry mega corporations along the

way they’ve inspired a great loyalty among fans and organizations including NASA who

ordered soda during their space shuttle program

Mike Spear: ” and I find out that was just neat They put it in their VIP areas so I would imagine senators and vice president senior drinking Jones as they watch the space shuttle

launched into space I think in a model of some other soda brands if another CBG brand that

we make this emotional connection with consumers, and it just makes me feel good that we can

make people feel good so”

Summary

Read and fill in the blanks with the following words: transferred out, the cost reconciliation report,

percentage of completion, equivalent units, process costing, a job-order costing system, specific

cost category, partially completed units, costs flow, completed units, weighted-average method ,

work–in process

(1) is used in situations where homogeneous products or services are produced on a continuous basis (2) through the manufacturing accounts in

basically the same way in a process costing system as in (3)

However, costs are accumulated by department rather than by job in process costing

In process costing, the (4) of production must be determined for each

cost category in each department Under the (5) , the equivalent

units of production equals the number of units transferred out to the next department or to

finished goods plus the equivalent units in ending work in process inventory The

equivalent units in ending inventory equals the product of the number of

(6) in ending work in process inventory and their (7) with respect to

the specific cost category

Under the weighted-average method, the cost per equivalent unit for a (8) is

computed by adding the cost of beginning work in process inventory and the cost added during

the period and then dividing the result by the equivalent units of production The cost per

equivalent unit is then used to value the ending (9) inventory and the units

(10) to the next department or to finished goods

(11) reconciles the cost of beginning inventory and the costs

added to production during the period to the cost of ending inventory and the cost of units

transferred out Costs are transferred from one department to the next until the last processing

department At that point, the cost of (12) is transferred to finished goods

Questions

1 Under what conditions would it be appropriate to use a process costing system?

2 In what ways are job-order and process costing similar?

3 Why is cost accumulation simpler in a process costing system than it is in a job-order costing system?

4 How many Work in Process accounts are maintained in a company that uses process costing?

5 Assume that a company has two processing departments—Mixing followed by Firing Prepare a journal entry to show a transfer of work in process from the Mixing Department

to the Firing Department

6 Assume that a company has two processing departments—Mixing followed by Firing Explain what costs might be added to the Firing Department’s Work in Process account during a period

7 What is meant by the term equivalent units of production when the weighted-average method is used?

8 Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold The medallions are identical except for the materials used in their manufacture What costing system would you advise the company to use?

Topic 3 CVP analysis

Glossary

1 Break-even point The level of sales at which profit is zero

2 Contribution margin ratio

4 Degree of operating

leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits The degree of operating leverage is computed by dividing contribution margin by net operating income

5 Incremental analysis An analytical approach that focuses only on those

costs and revenues that change as a result of a decision

6 Margin of safety The excess of budgeted or actual dollar sales over the

break-even dollar sales

7 Operating leverage A measure of how sensitive net operating income is to

a given percentage change in dollar sales

8 Sales mix The relative proportions in which a company’s

products are sold Sales mix is computed by

expressing the sales of each product as a percentage of total sales

9 Target profit analysis Estimating what sales volume is needed to achieve a

specific target profit

10 Variable expense ratio A ratio computed by dividing variable expenses by

dollar sales

Concepts in action

1 Read and fill in the blanks with the following words: low, competitive disadvantage,

in contrast, loyal listeners, fixed costs, cost structure , revenue, bankruptcy, the weight of,

lost, variable costs decrease, high operating leverage, profitability, in debt, opposite, cut,

high , renegotiating, fee

Fixed Costs, Variable Costs, and the Future of Radio

Building up too much (1) can be hazardous to a company’s health

Because fixed costs, unlike (2) , do not automatically (3) as

volume declines, companies with too much fixed costs can lose a considerable amount of

money during lean times Sirius XM, the satellite radio broadcaster, learned this lesson the

hard way

To begin broadcasting in 2001, both Sirius Satellite Radio and

XM Satellite Radio—the two companies now comprising Sirius XM—spent billions of dollars

on broadcasting licenses, space satellites, and other technology infrastructure Once

operational, the companies also spent billions on other fixed items such as programming and

content (including Howard Stern and Major League Baseball), satellite transmission, and

R&D (4) , variable costs were minimal, consisting mainly of artist-royalty

fees and customer service and billing In effect, this created a business model with a

(5) —that is, the companies’ (6) had a very

significant proportion of fixed costs As such, (7) could only be

achieved by amassing millions of paid subscribers and selling advertising

The (8) of this highly-leveraged business model was nearly

disastrous Despite amassing more than 14 million subscribers, over the years Sirius and XM

rang up $3 billion (9) and tallied cumulative operating losses in excess of $10 billion

Operating leverage, and the threat of bankruptcy, forced the merger of Sirius and XM in

2007, and since then the combined entity has struggled to (10) costs, refinance its

sizable debt, and reap the profits from over 18 million monthly subscribers

While satellite radio has struggled under (11) too much fixed cost,

Internet radio had the (12) problem—too much variable costs But “How?”

you ask Don’t variable costs only increase as revenues increase?

Yes, but if the revenue earned is less than the variable cost, an increase in revenue can lead

to (13) This is almost what happened to Pandora, the Internet radio

service

Pandora launched in 2005 with only $9.3 million in venture capital Available free over

the Internet, Pandora earned revenue in three ways: advertising on its Web site, subscription

fees from users who wanted to opt-out of advertising, and affiliate fees from iTunes and

Amazon.com Pandora had (14) fixed costs but (15) variable costs for

streaming and performance royalties Over time, as Pandora’s popular service attracted

millions of (16) , its costs for performance royalties––set by the Copyright

Royalty Board on a per song basis––far exceeded its revenues from advertising and

subscriptions As a result, even though royalty rates were only a fraction of a cent, Pandora

(17) more and more money each time it played another song!

In 2009, Pandora avoided bankruptcy by (18) a lower per-song

royalty rate in exchange for at least 25% of its U.S revenue annually Further, Pandora began

charging its most frequent users a small (19) and also started increasing its

an employee working for the company or you are a devoted customer to the product the

Southwest offered for nearly 40 years”

Back then in 1971 southwest was just a scrappy upstart with a cheeky sense of humor

Today they ‘re still cheeky but they carry more passengers within the US than any other

airlines and they’ve been (1) every single year of their existence even during

(2) when some competitors were losing 10 to 15 million a day

Managing any business requires an understanding of how costs respond to changes in

(3 and the effective changes in (4) in (5) on (6)

Within (7) companies classify costs in a (8) of ways

(9) are costs that vary in total (10) with changes

in the (11) so for example if an airline paid 10cents a bag for peanuts and a

flight had one passenger the cost for peanuts would be 10cents If there were 50 passengers the

cost would be $5 and if there were 100 passengers it would be $10 Variables costs may also

be defined as costs that (12) at every level of activity within

(13) So the per unit cost up a bag of peanut would be the same

regardless of the number of passengers on the plane (14) are cost that

(15) regardless of changes in the activity level the salary of the

pilot on that flight for example would be the same regardless if he or she flew 50 passengers or

100 Because total fixed costs (16) as (17) , fixed

costs per unit is very (18) with activity, as volume increases unit costs decrease

and (19) Thus if we were to calculate the pilot salary per passenger for one

passenger the fixed cost per unit would be $200, for 2 passengers it would be $100 and for

100 passengers it would be just $2

Today airlines like Southwest are thought of largely as variable cost companies

because fuel often their largest cost can (20) in price how significant is

this particular variable cost to their (21) , they consume 1,4 billion gallons

of fuel a year so just a 1 cent per gallon increase equals $14 million it follows then that

(22) would play a key role in their (23)

The most significant relationship in cost volume profit analysis is the

(24) at which total revenues equal total costs or the (25)

A great way for a company to determine a break – even point is to prepare

(26 also known not surprisingly as (27)

Let’s examine a typically airline round trip flight to keep things simple, we assume that every ticket costs $100 and that the plane has 150 seats Okay, looking at our graph we’ve got the unit of sales along the (28) which in this case is seats The (29) is labeled $ because we will use it to record both total revenues and total costs (fixed plus variable) First, we plot our total sales line starting at zero going up to (30) So total revenue for a full plane would be $100 x 150 seats or $1500 The revenue line here is (31) throughout, sets all tickets cost the same Next, we plot our total fixed cost which in this case happens to be $4000 and it is the same at every level of activity This represents things like the pilot salary overhead in

(32) A total cost line starts at the fixed cost line at zero activity For this flight we assume a variable cost of $ 60 per seat so if the plane were

(33) the variable cost would be$60 x 150 seats or $9,000 and the total cost would be $9,000 in variable costs plus $4,000 in fixed costs or $13,000

(34) that total costs from total revenue we get a $2,000 profit round – trip and where do they break-even? that would be here, at the (35) of the total cost line and the total sales line where at 100 seats or $10,000 in sales Southwest covers the costs but has not yet earn a profit Okay, now the interesting part, Southwest flights are not always full, of course , in fact the average last year was 75% occupancy On our graph, that translates to just $480 in profit round-trip or $240 each way $240 in profit cannot be true well yes in fact the

(36) for a one-way flight on Southwest last year was just slightly

higher at $290 and if your divide that by the average one-way ticket price of $58 you can see

that just 5 passengers per flight kept the most successful airline in the USA

Why are airline margin so razor thin mostly because ticket prices adjusted for inflation

or half of what they were 25 years ago Fuel costs have (37) and that explains

why most airlines now charge for checked baggage, most but not Southwest

Brad Hawkins :” the leadership really made a courageous decision early on this process the wall street analysts saying “what are you doing ? you’ve leaving hundreds of

millions of dollars in (38) on the table” but people don’t

want feel nickel-and-dime they don’t want to come back to that”

How did Southwest make this decision by analyzing (39) and

(40) Southwest flights’ re just one type of aircraft and the

resulting efficiencies give them the lowest baggage handling costs in the industry crunching

the numbers they predicted that the bags fly free program would lead to higher occupancy

rates and more revenue and the profits would outweigh incremental revenue gain from

baggage fees and as Brad’s explain, their prediction was correct

Brad Hawkins :” our leadership noted a significant share shift more than a 1% which is about a billion dollars’ worth of customer business shifting over to us for no reason other the

bags fly free strategy”

The airline business is complex in few companies today seem to properly manage all their fixed and variable costs from personnel to fuel contracts to flight schedules Southwest

does it well, manages customer loyalty and seems to have an awful lot of fun in the process

Michael Besancon:” the number one (1) of Whole Foods market is to

sell the highest quality natural organic foods possible Every store of Whole Foods market is

different and every store has a feel You could blindfold me and take me into a Whole Foods

Market anywhere in the country and I would know I was in a Whole Foods If I didn’t see any

signs because I would know it by the feel”

Whole Foods sells mostly organic groceries with an emphasis on fresh produces Their commitment to sustainable agriculture collaboration with suppliers in community wellness

makes them a premium brand that costs a little more than their big box competitors but

maintaining high quality and great value for the customers without compromising their core

values is the true secret to their success

(2) (CVP) is the study of the effects of changes in (3) and (4) on the (5) Is it important to (6) ?

determining (7) ? Maximizing use of (8) ?

setting (9) ? and often reported in a (10) for

(11) The income statement classifies costs as variable or fixed and compute

a (12) - the amount of revenue remaining after deducting variable

costs

Let’s start by reviewing some basics about CVP analysis, specifically break-even analysis, target net income and margin of safety For sake of simplicity, let’s assume you’re

selling just one product tomatoes at a farmers market (13) can be

computed by taking fixed costs and dividing by the contribution margin

((14) ) Contribution margin can also be expressed in the form of

the (15) , contribution margin divided by sales providing the

break-even point in dollars versus units When a company is in its early stages of operation, the

(16) is break even Failure to do so will lead to (17)

Once you’ve determined the break-even point, you want to set a sale goal that will

generate a (18) This will provide you with (19 in

either units or dollars depending on whether you use a contribution margin per unit or

contribution margin ratio Finally, (20) indicates how much sales

can decline before you’re operating at a loss and again can be expressed in dollar terms or as a

percentage

Ok, that seems easy enough Now let’s get back to the Whole foods where things are slightly more complicated because Whole Foods doesn’t just sell tomatoes, they sell thousands

of different products with different costs that fluctuate constantly under a variety of

(21) such as the weather, competition and transportation costs

Michael Besancon:” Produce could be a higher because of lower freight costs in one area and in another area it could have a lower margin on it what you have to do is you have to

blend your margin across the full spectrum of products “

Whole foods starts by determining their (22) , the (23) in which they sell their (24) Sales mix is important to managers because different

products often have substantially different contribution margin Managers can compute

break-even sales for a mix of two or more products by determining the (25) unit

contribution margin of all the products However to avoid having to calculate thousands of

different unique contribution margins they calculate the break-even point in terms of sales

dollars rather than units sold Using sales information for division of product lines, also they

must compute the (26) rather than contribution margin per unit

Ultimately, information such as this provided using CVP analysis can help managers better

understand the impact of sales mix on (27)

Price fluctuation is one thing but what happens when fluctuation strikes whole nations and industries during the recent recession, Whole Foods managed to actually maintain

profitability despite opening 16 new stores, they did this by reducing certain premium prices

and reducing the size of each new store allowing for savings in other areas

Michael Besacon “and we have moved into a direction of what we call right – sizing stores and the savings from that is that the rent obvious utilities and fewer team members

would be needed to start a store”

Companies that have higher fixed costs relative to variable costs have higher

(28) Operating leverage is calculated as the contribution margin

divided by the (29) When a company sales revenues are increasing high

operating leverage can mean that profits will increase rapidly However when sales are

declining too much operating leverage can have quite devastating effects on the company By

working with suppliers and streamlining store space to control costs lower overhead gives

Whole Foods a way to lower operating leverage This coupled with an increased

(30) or during trouble times allows Whole Foods to continue as a

competitive alternative for health-conscious grocery shoppers

Summary

Read and fill in the blanks with the following words: the contribution margin ratio, special case, sales mix, CVP analysis, a CVP graph, net operating income, break-even

analysis, critical questions, fixed expense, exceeds, the degree of operating leverage, constant,

multiproduct, the margin of safety, specified target profit

(1) is based on a simple model of how profits respond to prices, costs, and volume This model can be used to answer a variety of (2) such

as what is the company’s breakeven volume, what is its margin of safety, and what is likely to

happen if specific changes are made in prices, costs, and volume

(3) depicts the relationships between unit sales on the one hand and

fixed expenses, variable expenses, total expenses, total sales, and profits on the other hand The

profit graph is simpler than the CVP graph and shows how profits depend on sales The CVP

and profit graphs are useful for developing intuition about how costs and profits respond to changes in sales

(4) is the ratio of the total contribution margin to total sales

This ratio can be used to quickly estimate what impact a change in total sales would have on

(5) The ratio is also useful in (6)

Target profit analysis is used to estimate how much sales would have to be to attain a

(7) The unit sales required to attain the target profit can be estimated by

dividing the sum of the target profit and (8) by the unit contribution margin Break-even analysis is a (9) of target profit analysis that is used to

estimate how much sales would have to be to just break even The unit sales required to break even can be estimated by dividing the fixed expense by the unit contribution margin

(10) is the amount by which the company’s current sales

(11) break-even sales (12) allows

quick estimation of what impact a given percentage change in sales would have on the company’s net operating income The higher the degree of operating leverage, the greater is the

impact on the company’s profits The degree of operating leverage is not (13) —it depends on the company’s current level of sales The profits of a (14) company are affected by its (15) Changes in the sales mix can affect the break-even point,

margin of safety, and other critical factors

4 What is meant by the term operating leverage?

5 What is meant by the term break-even point?

6 In response to a request from your immediate supervisor, you have prepared a CVP graph portraying the cost and revenue characteristics of your company’s product and operations Explain how the lines on the graph and the break-even point would change if (a ) the selling price per unit decreased, (b ) fixed cost increased throughout the entire range of activity portrayed on the graph, and (c) variable cost per unit increased

7 What is meant by the margin of safety?

8 What is meant by the term sales mix? What assumption is usually made concerning sales mix in CVP analysis?

9 Explain how a shift in the sales mix could result in both a higher break-even point and a lower net income

Topic 4 Static Budgets

Glossary

1 Budget A detailed plan for the future that is usually expressed

in formal quantitative terms

2 Budget committee A group of key managers who are responsible for

overall budgeting policy and for coordinating the preparation of the budget

3 Cash budget A detailed plan showing how cash resources will be

acquired and used over a specific time period

4 Continuous budget A 12-month budget that rolls forward one month as

the current month is completed

5 Control The process of gathering feedback to ensure that a

plan is being properly executed or modified as circumstances change

6 Direct labor budget A detailed plan that shows the direct labor-hours

required to fulfill the production budget

7 Direct materials budget A detailed plan showing the amount of raw materials

that must be purchased to fulfill the production budget and to provide for adequate inventories

8 Ending finished goods

inventory budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet

9 Manufacturing overhead

budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period

10 Master budget A number of separate but interdependent budgets that

formally lay out the company’s sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet

11 Merchandise purchases

budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period

12 Participative budget See Self-imposed budget

13 Perpetual budget See Continuous budget

14 Planning Developing goals and preparing budgets to achieve

those goals

15 Production budget A detailed plan showing the number of units that must

be produced during a period in order to satisfy both sales and inventory needs

16 Sales budget A detailed schedule showing expected sales expressed

in both dollars and units

17 Self-imposed budget A method of preparing budgets in which managers

prepare their own budgets These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement

18 Selling and administrative

expense budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period

Concepts in action

Read and fill in the blanks with the following words: budgeting, value, companies, control, runs, accounts, managers, experts, expenses, revenue, sensitivity, competitive, users, decision making

Web-Enabled Budgeting and Hendrick Motorsports

In recent years, an increasing number of (1) have implemented

comprehensive software packages that manage budgeting and forecasting functions across the organization One such option is Microsoft Forecaster, which was originally designed by FRx

Software for businesses looking to gain (2) over their budgeting and forecasting

process within a fully integrated Web-based environment

Among the more unique companies implementing Web-enabled budgeting is Hendrick Motorsports Featuring champion drivers Jeff Gordon and Jimmie Johnson, Hendrick is the premier NASCAR Sprint Cup stock car racing organization According to Forbes magazine,

Hendrick is NASCAR’s most valuable team, with an estimated (3) of $350 million

Headquartered on a 12 building, 600,000-square-foot campus near Charlotte, North Carolina,

Hendrick operates four full-time teams in the Sprint Cup series, which (4) annually

from February through November and features 36 races at 22 speedways across the United

States The Hendrick organization has annual (5) of close to $195 million and more

than 500 employees, with tasks ranging from accounting and marketing to engine building and racecar driving Such an environment features multiple functional areas and units, varied worksites, and ever-changing circumstances Patrick Perkins, director of marketing, noted,

“Racing is a fast business It’s just as fast off the track as it is on it With the work that we put into development of our teams and technologies, and having to respond to change as well as

anticipate change, I like to think of us in this business as change (6) .”

Microsoft Forecaster, Hendrick’s Web-enabled budgeting package, has allowed Hendrick’s financial managers to seamlessly manage the planning and budgeting process Authorized users from each functional area or team sign on to the application through the

corporate intranet Security on the system is tight: Access is limited to only the (7) that

a manager is authorized to budget (For example, Jeff Gordon’s crew chief is not able to see

what Jimmie Johnson’s team members are doing.) Forecaster also allows (8) at the racetrack to access the application remotely, which allows (9) to receive or update real- time “actuals” from the system This way, team managers know their allotted (10) for

each race Forecaster also provides users with additional features, including seamless links

with general ledger accounts and the option to perform what-if ((11) ) analyses Scott

Lampe, chief financial officer, said, “Forecaster allows us to change our forecasts to respond to changes, either rule changes [such as changes in the series’ points system] or technology

changes [such as pilot testing NASCAR’s new, safer “Car of Tomorrow”] throughout the

racing season.”

Hendrick’s Web-enabled budgeting system frees the finance department so it can work

on strategy, analysis, and (12) It also allows Hendrick to complete its annual

(13) process in only six weeks, a 50% reduction in the time spent budgeting and

planning, which is critical given NASCAR’s extremely short off-season Patrick Pearson from

Hendrick Motorsports believes the system gives the organization a (14) advantage:

“In racing, the team that wins is not only the team with the fastest car, but the team that is the

most disciplined and prepared week in and week out Forecaster allows us to respond to that

changing landscape.”

Budgetary Planning at BabyCakes

Listen and fill in the blanks

OK So, you are the owner of BabyCakes NYC, the most popular health-conscious vegan bakery in the city and you just opened a second store but it’s all the way across country

in Los Angeles, and you’re facing your first big holiday rush, so how you can budget for it?

First, let’s go over some basics Budgeting which is defined as a written statement that

management’s plans for a specific period expressed in (1) is a cornerstone of

planning for any business, large or small

Erin McKenna: “Aside from doing the baking, the frosting and designing uniforms, I’m

also in charge of all (2) myself Budgeting definitely makes us more

efficient and helps us judge (3) of the company and it help us be a little bit

more responsible in (4) .”

Once budgets are established, they become important basis for evaluating future

performance They can motivate (5) to meet objectives, they serve as a

deterrent waste, to promote efficiency and they can serve as (6)

Erin McKenna: ‘If I didn’t budget I would definitely overspent because there’s so many

things that I want to do for the bakery It’s like having a baby, and you want to dress it up, and

you want to take it to Disney World, and you want to make it as fun as possible.”

Sometimes people confuse budgeting with planning Whereas planning focuses on

(7) , budgeting deals with (8) Budgets can be

prepared for any period of time In the case of Babycakes, Erin prepares (9) budget

which is supplemented by (10) budgets

Erin McKenna: “From there we know what we can buy, how much we put into certain

items and that way we can look at an extended period of sales trends or weather, holidays ”

Holidays like Valentine’s Day which brings us back to our starting point With Valentine’s Day quickly approaching Erin’s need to be sure that she has allocated

(11) to handle the rush, assuming there will be a rush in the new

location So how did she proceed?

In business, (12) normally contains two classes of budgets (13) , which will discuss in this video, and (14) There

are many different types of (15) but we’ll focus on the two that Erin uses

predominately Budget goals of course are based on past performance In larger companies,

data collected from various organizational units beginning several months before the end of