Managerial Accounting Concepts 2.1 &2.2 Flashcards

Question

What are examples of Fixed Costs?

Answer 1

Fixed Costs: * Remain constant in the short run even when sales volume varies * In the long run they can change * Fixed cost per unit goes down as unit sales go up * Examples * Salaries * Rent Expense * Insurance * Property Taxes * Depreciation Expense

Answer 2

Avoidable Fixed Costs Unavoidable Fixed Costs Semi-variable Costs (Mixed)

Answer 3

Avoidable Fixed Costs * Do not affect the ability to provide goods and services * They are not required * Example: If there is a fixed advertising campaign of $5,000 per month, the company can stop the advertising and still stay in business; although sales volumes may suffer

Answer 4

Unavoidable Fixed Costs * Costs that must be incurred if business is to continue * Example: The monthly lease for the restaurant space is $25,000 a month. The lease expense is an unavoidable fixed costs, if not incurred then there is no restaurant and therefore the business would need to close

Answer 5

Semi-variable Costs (Mixed) * Have both a variable and fixed component * Example: A commercial lease may have fixed rent per month plus an additional rent based on sales * Rent for a doughnut shop may be $5,000 per month fixed and 10% of total revenue. The $5,000 is fixed and the 10% portion is variable

Answer 6

**_Total Costs_** Variable + Step Costs + Fixed Costs _+ Mixed Costs_ = Total Costs

Answer 7

High - Low (Two Point Method) Scattergram Regression analysis

Answer 8

High - Low (Two Point Method) * Select a sample high and low month for Sales (or Costs) * Calculate difference in two measures (Sales or Costs and Activity) * Divide activity difference into Sales or Cost Difference * Result Is Variable Cost Per Unit * Solve for Fixed Costs

Answer 9

Scattergram * Graph Sales (Cost) Data with activity * Draw best straight line through data * Where intersects Y Axis Is Fixed Costs * Solve for Variable Cost Per Unit

Answer 10

Regression Analysis Method of Least Squares * Computation of Best Straight Line * Y = a + bx * b = Slope of Line or Variable Cost Per Unit * A = Y Intercept or Fixed Cost

Answer 11

Indifference Point * Decision to select fixed or variable cost arrangement is based on cost-benefit considerations involved * Indifference point is the sales (revenue) level at which the period cost is the same under either arrangement

Answer 12

Indifference point (X) : $40,000 = 0.02X X = $2,000,000

Answer 13

The variable lease cost will be 2%×3,000,000= $60,000 Since the fixed lease arrangement will cost $20,000 less than the variable lease arrangement, you would select the **_Fixed lease option_**

Answer 14

Cost Allocation * Distribution of Overhead Costs to the Profit Centers * Single Allocation Base Approach - Uses a single factor such as Square Footage, Number of People, Revenue * Multiple Allocation Approach - Use the most closely related factor

Answer 15

Horizontal Analysis * Compares two periods * Need comparative balance sheet * Simplest approach * Shows the absolute change in dollars between two periods * Shows percentage change

Answer 16

Vertical Analysis * Often referred to as common size analysis * Calculating the % of individual assets to total assets * When completed the total assets would equal 100% * Same is done for liabilities and equity accounts, combined liabilities and equity total should be 100%

Answer 17

Compare Against Something * Prior Period * Industry Standard * Budget * Ratio Analysis Express in a Number of Ways * Percentage * Per Unit Basis * Turnover * Coverage

Answer 18

1. Horizontal analysis 2. Vertical analysis 3. Ratios analysis 4. Variance analysis

Answer 19

**_Classes of Ratios_** **Liquidity** - Ability to Meet Short Term Obligations (CAAAOW) * Current Ratio—measures short term cash needs CA/CL * Acid Test Ratio (Quick Ratio)—measures short term cash needs more vigorously * A/R Turnover—measures efficiency of collection and credit policies * Average Collection Period—gauges liquidity of Accounts Receivable * Operating Cash Flows to Current Liabilities * Working Capital Turnover **Solvency** - Extent to Which the Enterprise Has Been Financed **Activity** (Turnover) - Ability to Use the Property’s Assets **Profitability** - Measurement of Management’s Overall Effectiveness **Operating** - Analysis of Hospitality Establishment Operations

Answer 20

Current Ratio: Measures ability to meet short-term cash needs Formula: **Current Assets / Current Liabilities** Expressed as a coverage of so many times * A current ratio of 1.58 for example would indicated that for $1 in current liabilities you will have $1.58 in current assets to cover that. You are “over” covered by .58

Answer 21

Acid Test Ratio (Quick Ratio): Measures ability to meet short-term cash needs more rigorously _Formula_ **(Cash, Short-Term Investments, Notes Receivable & Accounts Receivable)/Current Liabilities** Expressed as a coverage of so many times * An Acid Test Ratio of 1.44 would indicate that for $1 of current liabilities there are “quick” assets of $1.44

Answer 22

Accounts Receivable Turnover: Measure of efficiency of firm’s collection and credit policies _Formula_ Total Revenue / Average Accounts Receivable (Beg + End A/R) / 2 Recorded as a turnover * A/R Turnover of 11.76 times indicates that on average the company’s accounts receivable turned over 11.76 times during the year

Answer 23

Average Collection Period:Helps gauge liquidity of accounts receivable (ability to collect cash from customers) _Formula_ **Number of Days in Year/ AR Turnover** Expressed in days * An average collection period of 31 days means that, on an average, the business was collecting on all its Accounts Receivables every 31 days

Answer 24

Measures the extent of a firm’s financing with debt relative to equity and its ability to cover interest and other fixed charges in the long term Examples: * Solvency Ratio—measures the coverage of assets over liabilities * Debt to Equity Ratio—measures the extent the company’s financing is with debt

Answer 25

**Solvency**- Total Assets to Total Liabilities and Total Liabilities to Total Assets * Debt-Equity * Long Term Debt to Total Capitalization * Number of Times Interest Earned * Fixed Charge Coverage * Operating Cash Flows to Total Liabilities

Answer 26

**Solvency**- Total Assets to Total Liabilities and Total Liabilities to Total Assets * Debt-Equity * Long Term Debt to Total Capitalization * Number of Times Interest Earned * Fixed Charge Coverage * Operating Cash Flows to Total Liabilities * **_Example_** Total Assets = 1,176,300 Total Liabilities = 659,000 1,176,300/659,000= 1.79 times

Answer 27

Debt-Equity Ratio: Measures the extent of financing with debt **_Formula_** **Total Liabilities/ Total Owner’s Equity** Reflected as a coverage ratio Compares debt to the net worth or Owner’s Equity * A debt to equity ratio of 1.27 would indicate that for every $1 of equity the business owes creditors $1.27 **_Example_** Total Liabilities = 659,000 Total Owner’s Equity = 517,300 659,000/517,300 = 1.27 to 1 * If the ratio is greater than 1, the majority of assets are financed through debt. If less than 1, then assets are mostly financed through equity

Answer 28

Ratios that measure the efficiency of various operations of a business. These ratios measure the efficiency of the firm in using its resources/assets and are sometimes referred to as Asset Management Ratios Examples: * Inventory Turnover * Working Capital Turnover * Property and Equipment Turnover * Asset Turnover * Paid Occupancy Percentage * Complimentary Occupancy * Average Occupancy Per Room * Multiple Occupancy

Answer 29

Asset Turnover Ratio:Assesses effectiveness in generating revenue from investment in total assets _Formula_ **Total Revenues/Average Total Assets** Reflected as a turnover ratio * An Asset Turnover Ratio of 1.21 times indicates that each dollar of assets generated $1.21 dollars in revenue

Answer 30

**Paid Occupancy Percentage**:Measures success in selling its product ## Footnote Paid Rooms Occupied/Available Rooms Reflected as a percentage % * A paid occupancy percentage of 80% indicates that 80% of the hotel rooms available to sell were sold by patrons who paid for the room Example Paid rooms = 2,100 Number of rooms in hotel = 80 Time Period = one month (January) Rooms Available to Sell = Number of Rooms in the hotel X Number of days in either in the day, month, or year depending on the time period being reported 2,100/(80 \* 31) = 2,480 = 84.67%

Answer 31

Average Occupancy per Room: Measures the number of guest in each occupied room _Formula_ Number of Guests/Number of Rooms Occupied Presented as a number of guest * Average Occupancy per room of 1.14 guests would indicate that in every room that is occupied (paid or complimentary) there are 1.14 guests in the room **_Example_** Number of Guests = 24,160 Number of Rooms Occupied = 21,160 24,160/21,160 = 1.14 guests

Answer 32

Seat Turnover:Measures the occupancy of a food service facility **_Formula_** Guests Served/Number of Seats x Number (Days Open or Hours during a meal period or hours in day) Presented as a turnover * A restaurant seat turnover of 1.53 times indicates that the restaurant is turning its available tables over 1.53 times per the time period being measured (i.e. day, meal period, etc.) **_Example_** Guests Served for Year = 56,000 Number of Seats = 100 Number of Days in the Year = 365 56,000/(100 x 365) = 1.53 times

Answer 33

Inventory Turnover: Measures efficiency of inventory management **Formula** Cost of Goods /Average Inventory Expressed as a turnover ratio * A food inventory turnover ratio of 12.2 times indicates that the food inventory turned over 12.2 times during the time period analyzed **_Example_** Food Cost 122,000 Average Food Inventory = Beginning Food Inventory + Ending Food Inventory/2 122,000/((11,000 + 9,000) / 2) = 12.2 times

Answer 34

Property and Equipment Turnover (Fixed Asset Turnover) Assesses effectiveness in generating sales from investment in fixed assets **Formula** Total Revenue/Average Property and Equip. Reflected as turnover ratio * A turnover ratio of 1.68 indicates that revenue was 1.68 times the average total property and equipment Example: Total Revenue = 1,352,000 Average Property & Equipment\* = (Total Property and Equip. Beg of Year + Total Property and Equip. End of Year)/2 1,352,000/((809,000 + 798,300) / 2) = 1.68 times \*Note: The Property and Equipment is net of depreciation

Answer 35

Measures the overall performance and efficiency in managing assets, liabilities and equity. Some profitability ratios are based on sales and other are based on investments Based On Income Statement: * Profit Margin * Gross Operating Profit * Gross Operating Profit Per Available Room Based on Balance Sheet and Net Income * Returns on Assets * Returns on Owners' Equity

Answer 36

Profit Margin:Measures profit generated after consideration of all expenses and revenues **Formula** Net Income/ Total Revenue Reflected as a percentage A profit margin of 10.85% indicates that for every $1 in revenue the business kept $.1085 **_Example_** Net Income = 146,700 Total Revenue = 1,352,000 146,700/1,352,000= 10.85%

Answer 37

Gross Operating Profit Margin:Measures gross operating profit which generally includes only costs controllable by management **Formula** Gross Operating Profit/ Total Revenue Reflected as a percentage * A Gross Operating Profit Margin of 30.73% indicates that for every $1 of revenue from operations $.3073 is available to cover fixed charges **_Example_** Gross Operating Profit = 415,500 Total Revenue = 1,352,000 415,500/1,352,000= 30.73%

Answer 38

Gross Operating Profit Per Available Room (GOPPAR):Measures ability to produce profits **Formula** Gross Operating Profit/Rooms Available Reflected on a per available room basis * A GOP per available room ratio of $14.23 indicates that the hotel generates $14.23 in gross operating profit for every room it has available **_Example_** Gross Profit (GOP) = 415,500 Available Rooms = 29,200 415,500/29,200= 14.23 GOPPAR

Answer 39

Return on Assets (ROA): ROA gives an idea as to how efficient management is at using its assets to generate earnings Net Income / Total Assets

Answer 40

Return on Owner’s Equity * Compares the profits of the business to the owner’ investment * Owner’s prefer a high ratio * Reflected as a percentage * A ratio of 31.30% indicates that $.3130 was earned for every $1 of Owner’s Equity

Answer 41

Assist in measuring the effectiveness of how the business is being operated **_Examples:_** * Mix of Sales * Average Room Rate * Revenue Per Available Room * Average Food Service Check * Food Cost Percentage * Beverage Cost Percentage * Labor Cost Percentage * Revenue Per Seat Available

Answer 42

Mix of Sales:Measures revenue by departments **Formula** Revenue for an operating segment/Total Revenue * Different operations yield different profit margins * Important for management to understand the impact of the mix of business to total profitability

Answer 43

Average Daily Rate (ADR): Measures average rate per available room sold **Formula** Rooms Revenue/Number of Rooms Sold $810,000/21,000= $38.57 * Does not include complimentary rooms only sold rooms * Best comparison is to the budget or competitors

Answer 44

Revenue Per Available Room (REVPAR): Measures the affect of both occupancy and rate in yielding the most per room inventory available **Formula** Rooms Revenue/Available Rooms 810,000/29,200= 27.74 It’s a comparable that can be used when looking at competitors or other hotels in the portfolio

Answer 45

Average Food Service Check: Measures the average revenue from each guest **Formula** Total Food Revenue/Number of Food Guests 300,000/56,000= $5.36 On average each guests spends $5.36 in food revenue at the restaurants

Answer 46

Food and Beverage Cost % Measures the cost of food or beverage to the revenues generated Formula Food or Beverage Cost/Food or Beverage Revenue $120,000/$300,000= 40% * Indicates that for every $1 in revenue $.40 were spent on the product that was sold * Management should compare this to budget or an industry standard this comparable to their operation

Answer 47

Measures how much labor costs represent in comparison to $1 of departmental sales **Formula** Total Labor Cost/Total Revenue or Departmental Revenue * Important to hospitality industry as it is very labor intense * The higher the percentage (i.e. expense increases), the lower the profits

Managerial Accounting Concepts 2.1 &2.2 Flashcards

(75 cards)