MA Revision Class

Sessions 8 to 12
 • Explain how changes in activity affect contribution margin
and net operating income.
• Use the contribution margin ratio (CM ratio) to compute
changes in contribution margin and net operating income
resulting from changes in sales volume.
• Show the effects on net operating income of changes in
variable costs, fixed costs, selling price, and volume.
• Determine the break-even point & the level of sales needed
Session 8 to achieve a desired target profit.
• Prepare and interpret a cost-volume-profit (CVP) graph and
CVP a profit graph.
• Compute the break-even point for a multiproduct company
and explain the effects of shifts in the sales mix on
contribution margin and the break-even point.
• Compute the margin of safety and explain its significance.
• Compute the degree of operating leverage at a particular
level of sales and explain how it can be used to predict
changes in net operating income.

2
Exercise 1
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant
that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last year, the
company sold 30,000 of these balls, with the following results:

Required:
1. Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level.
2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place
and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the
same net operating income, $90,000, as last year?
 Session 9 Differential
Analysis

Identify relevant and Prepare an analysis showing Prepare a make or buy

irrelevant costs and benefits whether a product line or analysis.
in a decision. other business segment
should be added or
dropped.

Prepare an analysis showing Determine the most Prepare an analysis showing

whether a special order profitable use of a whether joint products
should be accepted. constrained resource. should be sold at the split-
off point or processed
further.
Exercise 2
Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level
of 60,000 units per year is:

Required:
1. If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company’s total fixed
costs.)
2. Assume the company has 1,000 units of this product left over from last year that are inferior to the current model. The units must be sold
through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain.
 Session 10 Planning

1 2 3 4 5 6

Understand why Explain the Costs Understand the Understand the Prepare a Master Prepare Budget
organizations and Benefits of Behavioral Key Components Budget for a on the Key
budget and the Budgeting Aspects of of Master Budget Manufacturing Components for
processes they Budgeting in Company the Service
use to create Manufacturing, Industry
budgets Merchandising
and Service
Industries
Exercise 3
The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

In addition, the beginning raw materials inventory for the 1st Quarter is budgeted to be 6,000 grams and the beginning accounts payable for the 1st
Quarter is budgeted to be $2,880.
Each unit requires 8 grams of raw material that costs $1.20 per gram. Management desires to end each quarter with an inventory of raw materials
equal to 25% of the following quarter’s
production needs. The desired ending inventory for the 4th Quarter is 8,000 grams. Management plans to pay for 60% of raw material purchases in the
quarter acquired and 40% in the
following quarter. Each unit requires 0.20 direct labor-hours and direct laborers are paid $11.50 per hour.
Required:
1. Prepare the company’s direct materials budget and schedule of expected cash disbursements for purchases of materials for the upcoming fiscal year.
2. Prepare the company’s direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is adjusted each quarter to match
the number of hours required to produce the forecasted number of units produced.
Session 11 Flexible
Budgeting
❑ Budgetary control

❑ Prepare a Flexible Budget

⮚ Prepare a report showing activity variances

⮚ Prepare a report showing revenue and spending

variances
⮚ Prepare a performance report that combines activity
variances and revenue and spending variances
⮚ Prepare a flexible budget with more than one cost
driver
⮚ Understand common errors made in preparing
performance reports based on budgets and actual
results
Exercise 4
Session 12
Standard Costs &
Variances

❖ Explain how and why standard costs are

developed

❖ Compute and evaluate direct materials variances

❖ Compute and evaluate direct labor variances

❖ Compute and evaluate variable overhead

variances

❖ Compute and evaluate fixed overhead variances

❖ Explain the advantages and disadvantages of

using standard costs and variances

❖ Record standard costing journal entries

10
Exercise 5
The president was elated when he saw that actual costs exceeded standard costs by only $0.30 per football. He stated, “I was
afraid that our unit cost might get out of hand when we gave out those raises last year in order to stimulate output. But it’s
obvious our costs are well under control.” There was no inventory of materials on hand to start the year. During the year, 32,000
feet of materials were purchased and used in production.

Required:
1. For direct materials: Compute the price and quantity variances for the year.
2. For direct labor: Compute the rate and efficiency variances.
3. Compute the variable overhead rate and efficiency variances.
4. State possible causes of each variance that you have computed.