ACC 310F Study Guide - Fall 2018, Comprehensive Midterm Notes - Accounting, Financial Statement, Balance Sheet
ACC 310F
MIDTERM EXAM
STUDY GUIDE
Fall 2018
ACC 310F Unit 1
• Four-step framework for making decisions is that individuals:
1. specify the objectives they want to accomplish when making their decision
2. identify the alternatives they want to consider
3. measure the costs and benefits of these alternatives
4. choose the alternative with the highest value.
• A specific role of accounting is to enhance the ability to measure the costs and benefits of
decision alternatives.
The principles of relevance and controllability facilitate the identification and measurement of
costs and benefits. When deciding between the status quo and other alternatives,
relevant/controllable costs and benefits are ones that differ between these decision alternatives.
For example, when deciding whether or not to take this course, a relevant/controllable cost is any
tuition or fee that must be paid before taking the course. That is, since the fee is paid only if the
course is taken, this fee is a relevant/controllable cost of this decision alternative.
The controllability of costs and benefits is linked to the time horizon of the decision. In short
horizons, organizations often have a difficult time altering many of its capacity-related resources
such as property, plant, equipment, and salaried personnel. Similarly, changing many personal
capacity resources such as living quarters and modes of transportation is difficult as well. Thus,
these capacity resources are typically not controllable for short-horizon decisions. When making
longer-horizon decisions, however, these capacity resources become more changeable and,
thus, more controllable.
Variability is the relation between a cost or benefit and an activity.
Traceability is the degree to which a cost or benefit relates to a decision option.
• A direct cost or benefit relates entirely to a decision option.
• Only a portion of an indirect cost relates to a decision option. As such, we often relate
indirect costs to decision options with less confidence.
ACC 310F Unit 2
• A portion of a company's costs are likely fixed and therefore not controllable in the short
term. These costs, including such capacity-related items such as property, plant,
equipment, and salaried personnel, would not vary based on activities such as a
company's sales volume. However, a portion of a company's costs are likely variable.
These costs, which would vary based on activity levels such as sales volume, are
often affected by short-horizon decisions. Thus, to make effective short-horizon
decisions, we often need to separate out variable costs from fixed costs.
• Cost-Volume-Profit (CVP) equation:
Profit before taxes = (Price – unit variable cost) × Sales volume in units – fixed costs
• Revenues increase proportionally with sales volume
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o CVP analysis assumes that the selling price per unit is constant and does not vary
with sales volume. This assumption reflects general practice, as most companies
tend to adopt stable pricing policies. If needed, we can use CVP analysis to
examine "flexible" pricing policies such as special-order pricing problems.
• Variable costs increase proportionally with sales volume
o CVP analysis assumes that the unit variable cost is constant and does not vary
with sales volume. This assumption says that the firm is operating in the "relevant
range."
• Selling prices, unit variable costs, and fixed costs are known with certainty
Single-period analysis
• The typical CVP analysis assumes that all revenues and costs occur in a single period.
CVP analysis does not allow a role of inventory, which means that we might incur the
costs of production this period but realize the associated sales revenue the next period.
The tax assumption in CVP also assumes a single-period focus as it does not allow for
complex tax provisions such as carrying losses to future periods. Finally, CVP analysis
does not take into account the time value of money, which reflects the notion that the
buying power of a dollar today is not the same as the buying power of a dollar a year
from now. This assumption again underscores that CVP analysis is primarily a tool
for short-term decision making.
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