managerial accounting formulas cheat sheet, Cheat Sheet of Managerial Economics

Download managerial accounting formulas cheat sheet and more Cheat Sheet Managerial Economics in PDF only on Docsity! Page 1 of 5 Ten Managerial Accounting Formulas By Mark P. Holtzman from Managerial Accounting For Dummies (http://www.dummies.com/how-to/content/ten-managerial-accounting-formulas.html ) Managerial accountants compute and provide information within a company. Managerial accounting information is numeric, calculated using certain formulas. The following list summarizes some of the most important formulas in managerial accounting. Formula 1: The Accounting Equation The accounting equation equates assets with liabilities and owners’ equity: Assets = Liability + Owners' Equity Assets are things owned by the company — such as cash, inventory, and equipment — that will provide some future benefit. Liabilities entail future sacrifices that the company must make, such as paying bills or other kinds of debts. Owners’ equity represents the portion of the company that actually belongs to the owner. A basic rule of accounting is that the accounting equation must always balance. If assets exceed the sum of liabilities and owners’ equity, then the company holds things that don’t belong to anyone. If the sum of liabilities and owners’ equity exceeds assets, then owners and creditors lay claim to things that don’t exist. Formula 2: Net Income Net income is called the bottom line because in many ways it’s the sum total of accountants’ work. To calculate net income, subtract expenses from revenues: Revenues – Expenses = Net income Revenues are inflows and other kinds of sales to customers. Expenses are costs associated with making sales. Accountants also sometimes need to add gains or subtract losses in net income; these gains and losses come from miscellaneous events that affect stockholder value, such as selling equipment at a gain or getting your factory destroyed by a mutated prehistoric survivor of the dinosaurs. Formula 3: Cost of Goods Sold For manufacturers and retailers, cost of goods sold measures how much the company paid — or will need to pay — for inventory items sold. To compute a retailer’s cost of goods sold, use the following formula: Beginning + Inputs = Outputs Cost of beginning inventory + Cost of purchases – Cost of ending inventory = Costs of goods sold Page 2 of 5 Here, a retailer’s inputs are the cost of the purchases it makes. The outputs are the goods that were sold (recorded at cost, of course). Formula 4: Contribution Margin Contribution margin measures how selling one item, or a group of items, increases net income. To calculate contribution margin, subtract variable costs from sales: Total sales – Total variable cost = Total contribution margin Contribution margin helps managers by explaining how decisions will impact income. Should you prepare a special order with a contribution margin of $100,000? Yes, because it will increase net income by $100,000. Should you prepare another special order with a contribution margin of negative $50,000? No, because it will decrease net income. To compute contribution margin per unit, divide the total contribution margin by the number of units sold. Alternatively, you can calculate sales price less variable cost per unit: Sales price – Variable cost per unit = Contribution margin per unit To compute contribution margin ratio, divide contribution margin by sales, either in total or per unit: Formula 5: Cost-Volume Profit Analysis Cost-volume-profit (CVP) analysis helps you understand how changes in volume affect costs and net income. If you know sales price, variable cost per unit, volume, and fixed costs, this formula will predict your net income: Net income = (Sales price – Variable cost per unit)(Volume) – Fixed costs First, understand where this formula comes from. Consider how production volume affects total costs: Total cost = (Variable cost per unit x Volume) + Fixed costs Variable cost per unit is the additional cost of producing a single unit. Volume is the number of units produced. Fixed cost is the total fixed cost for the period. Net income is just the difference between total sales and total cost: Net income = (Sales price x Volume) – Total cost