ACG 2071 Notes PDF

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ACG 2071 full year Notes...

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Prologue ★ Managerial Accounting: planning (setting goals and objectives), controlling (evaluating results of business operations against plan, adjustments, moving toward goals of company), decision making (course of action) ○ Internal reports, internal users, does not need to follow GAAP, future oriented, relevant and timely ★ Ethical behavior: dishonesty, unfairness, irresponsibility, lack of objectivity ★ Corporate social responsibility: companies should be conscious of their impact on all aspects of society: economic, social and environmental ○ The triple bottom line: profits (economic), people (social), planet (environmental) UNIT 1 Chapter 1: Managerial Accounting and Cost Concepts ★ Types of Companies: ○ Service: sell (provide) intangible services ○ Merchandising: resell tangible products purchased from suppliers ○ Manufacturing: convert raw materials into finished products by using labor, plant and equipment ★ Direct versus Indirect Costs, what is a cost object?: anything we want to know the cost of ○ Direct costs: easily trace to a particular cost object, economically feasible, easy to measure, (football coach salary) ○ Indirect costs: cannot be easily traced to cost object, is not economically feasible (isn't worth the time or expense), ■ Common costs: incurred to support a number of cost objects ★ Cost Classification for Financial Reporting Purposes ○ Product costs/”inventoriable costs”: all costs incurred in acquiring or producing a product, tied to each unit, when product is sold product costs removed from inventory and balance sheet, transferred to income statement (expense) ■ For merchandising company: cost of merchandise, freight-in, customs/duties/tariffs, cost of getting ready for sale ■ For manufacturing company: direct materials (DM): raw materials, direct labor (DL): employees, manufacturing overhead (MOH): other costs, indirect materials, indirect labor, depreciation, insurance, utilities at plant Prime costs: direct materials, direct labor Conversion costs: direct labor, manufacturing overhead ■ Where do product costs appear on balance sheet?: Merchandising: in inventory until sold, one category Manufacturing: three categories: ○ Raw materials (RM) inventory: used in process ○ Work in progress (WIP) inventory: started not finished ○ Finished goods (FG) inventory: completed not sold ○ Period costs: all costs associated with the selling of products and the administration of the business, “operating expenses”, expensed in period incurred ★ Cost Behavior: the way a cost reacts to changes in activity levels, cost drivers/activity

base: cause costs to change ○ Variable costs: costs that change in total with changes in activity, same direction and proportion ○ Fixed costs: remain constant in total ■ Committed: company cannot change on short run ■ Discretionary: company has ability to change in short run

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Mixed costs: have both a fixed component and variable component ■ y(tot. mixed cost) = a(fixed cost(y-intercept)) + b(variable cost per unit of activity(slope) x(level of activity) Step costs: remain constant for a small range of activity then jump to different level with moderate changes in activity

★ Income Statement Formats

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Contribution margin income statements: sales - variable expenses = contribution margin - fixed expenses = operating income ★ Cost Classification for Decision Making ○ Relevant costs: impact a decision ○ Irrelevant costs: no impact of a decision ○ Differential costs: difference between two alternatives ○ Differential revenues: difference in revenues between two alternatives ○ Incremental costs: additional costs of one alternative over another ○ Incremental revenues: additional revenue generated by one alternative over another

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Sunk costs: costs already incurred and cannot be changed Opportunity costs: potential benefit forgone by choosing one alternative over another ★ Cost of Quality: all costs incurred to prevent, detect, and address defects ○ Quality costs fall into four categories: ■ Prevention: avoid poor quality goods/services ● Research and development, train employees, evaluate suppliers to ensure high quality ■ Appraisal: detect poor quality ● Inspecting materials, testing products, depreciation ■ Internal failure: incurred on defective units before delivery to customer ● Reworking defective products, scrapping defective products ■ External failure: incurred because defective goods are not detected until after delivery is made to customer ● Recalls, warranties, lost profits from lost customers ○ Conformance costs: (make sure products conform to intended design): prevention and appraisal ○ Nonconformance costs: (because product is defective): internal failure and external failure Hw: Total amount of product costs incurred: ((directs + variable moh) x number of units) + (fixed moh x number of units) Total amount of period costs incurred to sell: (sales commission + variable expense x number of units) + (fixed selling + fixed admin. X number of units) Variable cost per unit sold: directs + variable moh + commission + variable admin ex Av. fixed manufacturing cost per unit: (fixed moh x top number of units) / bottom number of units Total fixed manufacturing cost incurred: fixed moh x top number of units Contribution margin per unit: selling price - (directs + variable moh + commission + variable admin ex) Total direct manufacturing cost: directs x number of units Total indirect manufacturing cost: (fixed moh x top number) + (variable oh x number of units) Incremental cost per unit: directs + variable moh Chapter 2: Job Order Costing: Calculating Unit Product Costs ★ An Overview ○ Two types: ■ Job-order costing: unique or custom ordered products/services, differ in amount of DM, DL, and MOH, used for small batches and trades ■ Process costing: large numbers of identical units, uniform production, total cost divided ○ Measuring Direct Materials Cost ■ Bill of materials: lists quantity of each type of direct material needed ■ Materials requisition form: specifies type and quantity of materials to be

retrieved from storeroom, identifies job that will be charged for the cost Measuring Direct Labor Cost ■ Time Ticket or Labor Time Record: hour by hour summary of employee’s activities throughout day ○ Measuring Manufacturing Overhead Cost, includes indirect costs ■ Step 1: calculate an allocation rate referred to as the predetermined overhead rate (before the year begins) ● Predetermined MOH Rate = estimated total MOH cost / estimated total amount of allocation base ■ Step 2: once calculated, overhead can be “applied”, or allocated to different jobs as those jobs “use” the allocation base ● MOH applied to a particular job = predetermined MOH rate x amount of allocation base used by job ● Overapplied/underapplied or overallocated/underallocated MOH ★ Example ○ Total manufacturing cost: directs, direct labor, predetermined MOH rate= _per direct labor hour x number of labor hours ★ Departmental Rates ○ Plantwide overhead rate: single predetermined overhead rate ○ Ex: machining and assembly ○ “Traditional costing system” ○ Departmental MOH Rate = estimated total dep. MOH cost / estimated total dep. allocation base ○ Cost distortion: when some products are allocated too much MOH (overcosted) while others are allocated too little (undercosted) ○

Hw: Predetermined departmental overhead: Y = a + bx, (Dept 1) Y = estimated fixed moh + estimated moh per hour x estimated total hours used, (Dept 2), add together, divide by total machine hours used Moh applied: predetermined x actual used Total manufacturing cost: directs + direct labor + applied Unit product cost = total manufacturing cost / number of units Cost of goods sold = total manufacturing costs added together Chapter 7: Activity Based Costing: A Tool to Aid Decision Making ★ Activity Based Costing (ABC): break down based on the activities that cause the costs ○ Steps to implementing an activity based costing system: ■ Define activities, activity cost pools, and activity measures ■ Assign overhead costs to activity cost pools ■ Calculate overhead rates ■ Assign overhead costs to cost objects ○ Steps 1 & 2 ■ Activity: event that causes the consumption of overhead resources

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Activity Cost Pool: overhead cost associated with any activity, represents a “bucket” in which costs are accumulated that relate to a single activity in the ABC system Activity Measure: allocation base in an ABC system, “cost driver”

■ Step 3 ■ Activity Rate = estimated total cost in pool / estimated total amount of allocation rate Step 4 ■ MOH applied to particular job = activity rate x amount of allocation base used by job By analysing activities and cost drivers, companies are able to think about ■ What activities are driving costs? ■ Do these activities add value? ■ Is there a better or more efficient way to perform these activities?

Hw: Plantwide oh rate: total estimated cost / total expected direct labor hours Manufacturing oh allocated: (each product) total direct labor hours x plantwide oh rate Activity rate: estimate oh cost / expected activity Chapter 3: Job Order Costing: Cost FLows and External Reporting ★ Overview ○ Flow of costs summary ■ Product Costs ● Purchases of raw materials recorded on the balance sheet in the raw materials inventory account, when used in production as direct materials, costs are transferred directly into work in process inventory ● Transform direct materials into finished goods, direct labor costs are incurred and accumulated in work in process, MOH costs are needed and are allocated in work on process ● When products are completed, costs are transferred from work in process to finished goods inventory, referred to as the cost of goods manufactured ● When goods are solds, costs are transferred from finished goods inventory to cost of goods sold on the income statement, manufacturing costs are finally recorded as an expenses on income statement ■ Period costs (selling and administrative expenses)

★ Example ○ Purchase of raw materials on account: Raw materials inventory Accounts payable ○ Use of direct materials in production: Work in process inventory Raw materials inventory ○ Use of direct labor in production: Work in process inventory Wages payable ○ Step 1: calculate predetermined MOH rate, Step 2: allocate MOH to jobs based on actual allocation base required by the job ○ MOH account/ clearing account ○ Manufacturing costs incurred: MOH Raw materials inventory ○ Use on indirect labor in manufacturing process: MOH Wages payable ○ Other MOH costs: MOH Accumulated depreciation Prepaid insurance ○ Completion of job of home: Finished goods inventory Work in process inventory ○ Sale of the home: Cash Sales revenue Cost of goods sold Finished goods inventory ★ Underapplied and Overapplied MOH ○ Underapplied/underallocated: ■ actual > applied ■ Not enough MOH was allocated to jobs

■ CGS is understated, operating income is overstated Overapplied: ■ Applied > actual ■ Too much MOH was allocated to jobs ■ CGS is overstated, operating income understated ○ Allocated MOH → WIP inventory → FG inventory → CGS ○ How do we close/correct underapplied MOH?: ■ Underallocated → CGS understated (we need to increase CGS) ● CGS MOH ○ How do we close overapplied MOH?: ■ Overallocated → CGS overstated (need to decrease CGS) ● MOH CGS ○ Two things are accomplished through journal entry: CGS is adjusted and the MOH account is zeroed out ○ Could prorate the adjustment based on % of product cost that remain ★ Cost of Goods Manufactured and Cost of Good Sold ○ Calculating cost of goods sold ■ Step 1: raw materials inventory (calculate the DM used) Beginning raw materials inventory +Purchases of direct materials =raw materials available for use -ending raw materials inventory =direct materials used ■ Step 2: work in process inventory (calculate cost of goods manufactured) Beginning work in process inventory +direct materials used +direct labor used +MOH =total manufacturing costs -ending work in process inventory =cost of goods manufactured ■ Step 3: finished goods inventory (calculate cost of goods sold) Beginning finished goods inventory +cost of goods manufactured =cost of goods available for sale -ending finished goods inventory =cost of goods sold Hw: Manufacturing overhead applied= direct labor hours x predetermined oh rate Total manufacturacturing cost= raw materials used in production + direct labor + moh applied Total actual moh cost= indirect labor + depreciation, insurance, utilities, etc Over/underapplied moh: actual moh cost - manufacturing oh applied ○

Cost of goods available for sale= beg. finished goods inventory + cost of goods manufactured Gross margin= sales - cgs Net operating income= (sales + cgs) *Manufacturing costs- DM, DL, MOH: every other manufacturing cost Product- producing, period- selling + admin. Exam 1 Review: Prologue: 2 Questions (all conceptual) - Differences between financial and managerial accounting: Financial accounting: follows GAAP, Managerial accounting: planning, controlling, decision making, does not have to follow GAAP, future oriented - Corporate Social Responsibility: companies should be conscious of their impact on all aspects of society: economic, social and environmental The triple bottom line: profits (economic), people (social), planet (environmental) Chapter 1 and 1A: 11 Questions (3 conceptual) - Types of Companies: Service: sell (provide) intangible services, Merchandising: resell tangible products purchased from suppliers Manufacturing: convert raw materials into finished products by using labor, plant and equipment - Direct vs. Indirect Costs: (Cost object: anything we want to know the cost of) Direct costs: easily trace to particular cost object, economically feasible, easy to measure Indirect costs: not easily traced to cost object, not economically feasible - Identification and calculation of product costs, period costs, prime costs, and conversion costs: Product costs: associated with producing, tied to each unit Period costs: associated with selling, administration of business, operating expenses Product cost incurred= ((direct materials + direct labor + variable moh) x # units) + (fixed moh x # of units) Period costs incurred= (sales commission + variable expense x number of units) + (fixed selling + fixed admin. x number of units) Prime costs: dm, dl Conversion costs: dl, moh - Cost behavior (fixed costs versus variable costs) Variable: change with activity, same direction and proportion Fixed: constant in total, committed: does not change in SR, discretionary: changes in SR - Traditional Income Statement vs. Contribution Margin Income Statement Traditional income st= sales - cgs = gross profit - operating expenses = operating income Contribution income st= sales - variable ex = contribution margin - fixed ex = operating income - Quality Costs: Prevention: research and development, training, evaluation of supplies Appraisal: detect poor quality, inspections, testing, depreciation (conformance) Internal failure External failure (non-conformance)

Chapters 2, 2A and 7: 11 Questions (2 conceptual) - Calculation of product costs using a predetermined MOH rate to allocate MOH Predetermined MOH Rate = estimated total MOH cost / estimated total allocation base MOH applied to a particular job = predetermined MOH rate x allocation base used by job - Calculation of product costs using departmental rates to allocate MOH - Calculation of product costs using activity-based costing to allocate MOH Chapter 3: 11 Questions (4 conceptual) - Flow of costs through the balance sheet (inventory accounts) to the income statement Product costs: purchases of raw materials recorded on the balance sheet in the raw materials inv. account, when used as dm, costs transferred into work in process inv. Transform dm into finished goods, dl costs are accumulated in work in process, MOH costs are allocated in work on process Products are completed, costs transferred from work in process to finished goods inv. (referred to as the cost of goods manufactured) When sold, costs transferred from finished goods inv. to cgs on the income st., manufacturing costs recorded as expenses on income st. Period costs: - Calculation of over/underallocated MOH - Disposal of over/underallocated MOH Chapter 6: Variable Costing and Segment Reporting: Tools for Management *Absorption costing- all manufacturing costs are “absorbed” into the cost of the product Income statement: sales - cgs (v. moh, f. moh) = gross margin - selling and admin. (v and f op.) = op income ★ Variable Costing: only variable manufacturing costs (DM, DL, and variable MOH) are treated as product costs, fixed MOH treated as period costs, expensed in period incurred ○ When inventory levels are increasing, absorption costing will have more fixed MOH costs on the balance sheet and less fixed MOH cost on the income statement and higher operating income than variable costing ○ Income statement: sales - variable ex. = cont. margin - fixed ex. = op. income ★ Segment Reporting ○ Segment: a part (or activity) of an organization about which managers would like cost, revenue, and/or profit data ○ Traceable fixed cost (direct fixed cost): incurred because of the existence of a segment ○ Common fixed cost: supports the operations of more than one segment but is not traceable in whole or in pert to any one segment, no change if eliminated ○ Segment margin: the magin available after a segment has covered all of its own costs, more accurate than using operating income ■ Segment margin= contribution margin - traceable fixed cost

Hw: Unit product cost under variable costing= manufacturing costs (dm, dl, variable moh) Unit product costs under absorption costing= dm + dl + var. Moh + (fixed moh / units) Contribution margin under variable= sales - variable expenses (var. cgs + var. s&a) Operating income under variable= sales - variable expenses (var. cgs + var. s&a) - fixed expenses (fixed moh, fixed s&a) Gross margin= sales - cgs Operating income under absorption= sales - cgs - s&a ex. Chapter 5: Cost-Volume-Profit Relationships ★ CVP Analysis help managers make decisions: products/services to offer, prices to charge, marketing strategies, cost structure to maintain, determine sales volume to break even ○ Assumptions: ■ Selling price remains constant ■ Costs can be accurately divided into variable and fixed components ■ Costs are linear ● Variable costs are constant per unit ● Fixed costs are constant in total ■ Sales mix remains constant ○ Example: contribution margin per unit= sales price - vc per unit = CM per unit ○ Variable Cost ratio= variable cost / sales ○ Contribution Margin ratio= CM / sales ★ Breakeven Point and Target Point ○ # units to sell (breakeven or target op income) = (fixed ex. + target op income) / cm per unit

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Revenue > expenses = profit, sales volume > breakeven point = profit Expenses > revenue = loss, sales < breakeven = loss

★ What-If Analysis ○ Decrease in sales price → CM per unit decreases → contributes less to covering fixed costs → number of units to sell increases ○ Variable cost per unit decrease → CM per unit increases → every unit we sell contributes larger amount of fixed cost → units to sell decreases ★ Sales Mix and Multi-product CVP Analysis ○ Sales mix: relative proportion of a companies products that are sold ○ Approaches: (multi-product) ■

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★ Margin of Safety and Operating Leverage ○ Margin of safety: riskiness of a business, excess of current sales over the breakeven volume of sales ■ Margin of Safety= current sales (actual or budgeted) - breakeven sales ○ Operating leverage: how sensitive op income is to a given % change in sales ■ Degree of operating leverage (op. leverage factor)= CM / op income

★ Analysing Mixed Costs ○ Approaches (estimate fixed and variable components): ■ Account analysis: managers use judgement to classify costs as variable or fixed ■ Engineering approach: detailed analysis of what cost behavior should be ○ Approaches (use historical cost and activity data): ■ Y (mixed cost) = a (tot fixed cost (y-int))...