Fourteen.
Let me start with the last sentence, even though it's not numbers.
Which product had actual sales in excess of budget.
And what margin does OE divided by OF represent?
Okay, this looks like...
Now, this is how, what I like to call "uglifying".
They're taking a concept that's not too ugly, not too difficult, and now they're kind of
making it ugly.
All right, so let's what they're doing here.
All right.
We've got this beautiful graph.
It looks like this.
That was supposed to be straight.
Looks like this.
We've got OE.
We've got F.
We've got that.
And that.
Okay, so this is H, G, volume, dollars.
Okay, so at zero activity, we're going to lost this much.
This must be fixed cost.
It says, in the budgeted profit volume chart below, OG represents a two product company's
profit path.
EH, and HG, okay.
EH and HG.
And actually HG goes, it's not straight across.
It goes up a little more.
So, here's G. Okay.
Products one and two respectively.
So, this is product one, product two.
Sales, price, and cost behavior were budgeted, were as budgeted.
Actual total sales equaled budgeted sales.
So, sales were not different.
And there were no inventories.
Actual profit was greater than budgeted profit.
Which product had actual sales in excess of budget?
Okay.
Now, in just looking at these two, what did we learn earlier?
We learned that, if this is steeper and this is flatter, the steeper one is going to have
more profit per unit, right?
Because that's the variable, right?
That's going to be steeper, so that's going to be more profit.
The other thing, they're saying, what is OE divided by OF?
OE divided by OF.
Let's see.
OE is fixed costs.
OF is the quantity sold at break even.
Because at OF, that's going to be the quantity we sold at break even.
So, that means that our break even in sales dollars equals fixed cost over CM ratio.
So, therefore, our break even equals fixed over CM or CM ratio.
Therefore, if you were to come up with break even, bring that up, so if you end up with
fixed over break even, that equals CM ratio.
So, if our break even in units, fixed over CM.
So, break even in units is fixed over CM.
Therefore, if we want to end up with what?
They're saying, what is OE divided by OF?
OE is fixed, OF is break even.
Units, because that's quantity volume.
I was thinking it was dollars, but it's not, it's volume.
That would equal your CM.
Because, isn't break even in units equals fixed dollars over CM dollars?
Yeah, so therefore, if we were to take, multiply each side by CM.
Divide each side by break even and units, you end up with fixed over break even equals
CM.
So, therefore, it must be CM contribution margin.
And which product we sold more of?
You must have sold more of one than two, because this is steeper, therefore, steeper more profit,
because that is our profit going up.
So, that was a tricky question.
Read the solution carefully, but again, it's the kind of question that this would be in
the difficult, remember we have moderate questions and difficult questions.
This would have been one of the questions that they said, hey let's throw it on the
exam.
And we'll throw it in the what?
In the difficult area.
So, what did we cover in this section, just to kind of quickly review?
We went through and we talked about things like starting out with our different cost.
We said, we have Y total cost equals fixed plus variable times X.
So, we went through and did this.
Total cost equals fixed plus variable times X.
Where we said, this is the dependent.
This is, independent, I'm sorry.
This is independent, this is dependent.
Y equals fixed plus variable times X.
This is dependent upon this.
All right, and when you graph it, this is your X, this is your Y, here's your fixed
cost, here's your total cost, here's fixed, here's your variable.
As we look at that, we're going through and solving.
That's also called your flexible budget equation, which we're going to look at in another section.
We talked about manufacturing costs.
What are manufacturing costs?
We said, direct materials, direct labor, factory overhead.
These two are called prime.
These two are called conversion costs.
We went through and we said, variances, we'll deal with that in the next section.
What could go wrong with this, with this, with this?
That's called variance analysis.
We also went through and talked about the flow of a cost system.
We said the flow of a cost system was, you've got your raw materials.
work in process, finished goods.
And it goes beginning plus purchases available minus ending is raw materials used.
That goes into WIP.
You've got beginning plus direct materials, direct labor.
What kind of overhead?
Applied, based on a predetermined overhead rate.
What was your predetermined overhead rate?
We had, estimated over estimated.
This is called the numerator, denominator.
You come up with your cost per unit times actual equals your applied.
That's what we're going to put in here.
That equals WIP available minus ending is costs of good manufactured or completed.
Where to they go?
Go to finished goods, beginning plus costs of goods manufactured is finished goods available
minus ending is costs of goods sold, boom.
Costs of goods sold.
This is where you would just over under applied.
So, that was the flow of a cost system.
And that's how it flows through into the accounts and the different amounts that we were concerned
with.
Then we talked about variable and absorption costing.
Absorption gets absorbed into ending.
Variable, prime, direct, contribution margin.
We could have used a break even analysis.
That's called variable or absorption costing, and we did those two income statements.
The big difference was the treatment of your fixed overhead.
Under absorption, it gets absorbed into ending.
Under variable direct prime, it gets expenses incurred.
Remember, PSA, production is greater than sales, profit is greater under absorption.
Cost volume profit, two important formulas.
Fixed cost plus profit over your CM equals break even in units.
Fixed cost plus profit over CM ratio equals break even in sales.
We just looked at that last question about that chart.
It was tricky and difficult, but it said, what is your fixed cost over break even and
units?
That was your contribution margin.
What was the slope?
The difference is the profitability's going up faster here than here.
We must have sold more of this product than this.
That's why we made more profit, based on the same number of sales and same everything else.
All right?
That, my friends, is decision-making.
Study hard, and we'll see you soon.