Section one: Define:

1. Financial accounting.*

Develops information for external decision makers such as stockholders, suppliers, banks, and
government regulatory agencies.

2. Management accounting. *
Develops information to managers at various levels of organization, who use this information for
planning, controlling operations and decision-making.

3. Cost estimation.*

Analyzing the costs of acquiring and using each of two alternate types of equipment, assisting in a study
to determine whether to buy or make certain parts for manufacturing products.

4. High-low method.
The high-low method uses only the highest and lowest observed value of the cost driver and their
respective costs to estimate the slope coefficient, (b), and the constant, (a) of the cost function.
5. Breakeven point.
The breakeven point is the level of sales at which revenue equals expenses and net income is zero.
6. CVP analysis.
Cost volume profit (CVP) analysis is the study of the effects of output volume on revenue (sales),
expenses (costs), and net income (net profit).
7. Unit contribution margin.
It represents the amount of money each unit of a product contributes towards covering fixed costs and
generating profit.

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Differentiate between:
1. Financial Accounting, Management accounting.
1) Users :
Financial Accounting
External Users
Management accounting
Internal Users
2) Freedom of Choice :
Financial Accounting
Standard
Management accounting
Freedom – no constrains
3) Time Focus ( Past – Future ) :
Financial Accounting
Past orientation
Management accounting
Future orientation ( Planning )
4) Time Span :
Financial Accounting
1 year / semiannual ( less flexible )
Management accounting
From hourly to 10 – 15 years (Flexible)
5) Reports :
Financial Accounting
Summary (entity as whole)
Management accounting
Detailed (details of parts of organization products, department)
6) Use of other disciplines :
Financial Accounting
No
Management accounting
Yes
7) Precision :
Financial Accounting
More
Management accounting
Less
8) Information :
Financial Accounting
Monetary
Management accounting
Monetary / Non-Monetary

2. Different users of accounting information.

 Score keeping ( recording – Classifying )
 Attention directly ( Problem )
 Problem Solving ( Alternative solutions )

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3. Scorekeeping, attention directing, problem solving (giving examples).
 Score keeping : Daily recording of material purchase vouchers.
 Attention directly: Preparing a report of overtime labor costs by production department.
 Problem Solving : Analyzing the costs of acquiring and using each of two alternate types of
equipment.
4. Planning, controlling, decision-making.
 Planning:
Refers to setting objectives and outlining how they will be attained, Accountings formalize plans by
expressing them as budgets.
 Controlling:
Refers to implementing plans and using feedback to attain objectives Feedback is crucial to the cycle
of planning and control.
 decision-making:
Is the purposeful choice from among a set of alternative courses of action designed to achieve some
objective decisions within an organization are often divided into two types (planning decisions and
control decisions).
5. Performance reports, budgets.
 Performance reports
Provide feedback by comparing actual results with plans and by highlighting variances, which are
deviations from plans and used to judge decisions and the productivity of organizational units and
managers
 Budgets
These are forward-looking documents that outline the expected financial results for a future period.
6. Cost, Cost object.
 Cost
A cost represents any financial resource sacrificed or expense incurred for the purpose of achieving a
business objective. Costs can be monetary (e.g., salaries, materials) or non-monetary (e.g., employee
time, equipment depreciation).

 Cost object
A cost object is anything for which a separate measurement of cost is desired. It is the item or activity to
which costs are assigned or traced for analysis and decision-making purposes. Examples: A specific
product line (e.g., the cost to manufacture bicycles).

7. Cost driver (giving examples), Cost behavior, relevant range.

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- Cost driver:
Cost drivers are measures of activities that require the use of resources and thereby cause costs.
Ex.
- Cost behavior:
Cost behavior is how the activities of an organization affect its costs.
Ex.
- Relevant range:
Is the limit of cost-driver activity level within which a specific relationship between costs and the cost
driver is valid.
Ex.
8. Fixed costs, variable costs (giving examples).
Fixed costs
Is not immediately affected by changes in the cost-driver level.
Total fixed costs remain unchanged regardless of changes in the cost-driver.
Ex. Rent, Monthly payment, salary
variable costs
Changes in direct proportion to changes in the cost-driver level.
The per-unit variable cost remains unchanged regardless of changes in the cost-driver.
Ex. Raw material, Commission

8. Step Cost, Mixed cost (giving examples)

- Step cost:
A cost that changes abruptly at different intervals of activity because the resources and their costs come
in indivisible chunks. ( Semifixed ).
Ex. Rent 1 Factory for 1000$ , if increased to 2 Factory the rent increased to 2000$.

- Mixed Cost:
A cost that contains elements of both fixed-and variable cost behavior.

Ex. Salary + overtime

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1. Given the following information:

Month Cost Units

February $25,500 1,870
March 24,475 3,080
April 24,321 1,100
May 30,000 2,750
June 31,196 3,850

a. What is the highest and lowest levels of activity.

b. What is the cost function.
c. If the company plans to produce 5,000 units next month, compute the total costs.

Required a.

- Highest Level of Activity: June (31,196 $).

- Lowest Level of Activity: April (24,321 $).

Required b.

- fixed cost Y= a
- Variable cost Y = bx
- Mixed cost Y = a + bx

Required c.

High: 31196 = a + 3850 b

Low: 24321 = a + 1100 b
Diff: 6875 = 2750 b
b= 6875 / 2750 = 2.5
31196 = a + ( 3850 x 2.5 )
31196 = a + 9625
a = 31196 - 9625 = 21571
TC = a + bx
TC = 21571 + 2.5 x ( if X= 5000 )
= 21571 + ( 2.5 x 5000 )
= 34071

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2. Given the following information: Selling price per unit L.E. 100, unit variable cost L.E.
55, total fixed costs L.E. 400,000, quantity produced and sold 20,000 units. Prepare a
contribution margin income statement (showing totals, units, %).

Total (L.E.) Per Unit (L.E.) % of Sales

Sales Revenue 2,000,000 100 100%

(-) TVC (1,100,000) (55) 55%

TCM 900,000 45 45%

(-) TFC (400,000)

NOI 500,000 25%

3. Give a numerical example to compute the breakeven point using the contribution
margin approach.

Selling price per unit: $40

Unit variable cost: $30

Total fixed costs: $1000

Sales : 150 units

- Breakeven sales in Units and $

#BE = TFC/CM = 1000/10 = 100 units
$BE = TFC/CM x SP = 100 x 40 = 4000 $

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4. Given the following information: selling price L.E. 10, unit variable cost L.E. 4, total
fixed costs L.E. 36,000.

Compute:

a. Unit contribution margin.

b. Contribution margin ratio .

c. Break-even quantity.

Per Unit (L.E.) % of Sales

Sales Revenue 10 100%

(-) TVC (4) 40%

TCM 6 60%

(-) TFC (36000)

a. Unit contribution margin = 6 LE

b. Contribution margin ratio = 60%
c. Break-even quantity = TFC/CM = 36000/6 = 6000

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5. Given the following information: Sales revenue $ 450,000, total variable costs $196,000, total
fixed costs $200,000.

Compute:

a. Total contribution margin.

b. Contribution margin ratio.

c. Break-even point in sales dollars.

Total % of Sales

Sales Revenue 450000 100%

(-) TVC (196000) 44%

TCM 245000 56%

(-) TFC (200000)

a. Total contribution margin = 245000 LE

b. Contribution margin ratio = 56%
c. Break-even in sales dollars = TFC/CM% = 200000/0.56 = 357142.85 LE

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6. What is the effect of the following actions on the break even point:

a. Increasing selling price

b. Decreasing direct material cost

c. Decreasing total salaries

a. Increasing Selling Price = Decrease the Break-Even Point (BEP).

b. Decreasing Direct Material Cost = Decrease the Break-Even Point (BEP).

c. Decreasing Total Salaries = Depends on whether the salaries are fixed or variable.

7. If selling price per unit is LE 20, variable cost per unit is LE 18, and fixed cost per unit is LE
6, then increasing in number of units by ten units will lead to increasing profit by….

SP= 20 VC= 18 FC=6

SP - VC = CM = 20 - 18 = 2 LE

Profit Increase = CM x Increase in Units = 2 x 10 = 20 LE

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8. Given the following information: Total fixed costs L.E. 313,500, unit variable cost L.E. 99,
Selling price L.E. 154. If management has a targeted operating income of L.E. 46,200, compute
the number of units that must be sold.

CM = SP – VC = 154 - 99 = 55

TCM = TFC + TOI = 313500 + 46200 = 359,700

Number of Units Required = TCM / CM = 359700 / 55 = 6540 units to achieve the targeted operating
income 46200 LE

9. Given the following information: break-even point 50,000 units, selling price LE 50, variable
costs ratio 80%, total fixed costs L.E. 500,000. Compute the total units that must be sold to
reach a target operating income profit of LE 60,000.

Total (L.E.) Per Unit (L.E.) % of Sales

Sales Revenue -------------- 50 100%

(-) TVC (---------------) (40) 80%

TCM 560000 10 20%

(-) TFC (500000)

NOI 60000

VC = SP x VC% = 50 x 80% = 40 LE

CM = SP – VC = 50 - 40 = 10 LE

TCM = Target profit + TFC = 60000 + 500000 = 560000 LE

Total units required = TCM / CM = 560000 / 10 = 56000 Units to achieve the targeted operating income
60000 LE

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10. Given the following information: planned sales 200,000 units, variable costs LE 120, 000,
fixed costs L.E. 56,000, breakeven quantity 160,000 units. Compute the safety margin.

Safety Margin = Sales – BE = 200000 – 160000 = 40000 units

11. The government allocated an appropriation of L.E.200,000 for a public university. It

is expected that the variable cost will be L.E.800 per student, whereas the monthly
fixed costs will be L.E.120,000. How many students would be served next month?

200,000= Q800+120,000

Q ( Students ) =100

The university can serve a maximum of 100 students next month

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