Georgetown - Sophomore - Managerial Accounting - Test 1 Outline PDF

Preview

Summary

This document represents a comprehensive review of all of the topics for the first test of this course....

Description

Managerial Accounting Test 1 Outline Chapter 1 What is Management Accounting about? 1. Information for internal management purposes 2. Process that cuts across the entire organization 3. Includes many types of information Managers three primary responsibilities 1. Planning a. Setting goals and objectives and how to achieve them 2. Directing a. Overseeing the company’s day-to-day operations 3. Controlling a. Evaluating the results of business operations and making adjustments as needed Sarbanes-Oxley Act  An act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes Senior management affects employees’ ethical behavior by its actions, the cultural belief systems it permits to develop, and the boundary systems it puts in place. IMA’s Statement of Ethical Professional  Not all unethical behavior is illegal, but all illegal behavior is unethical  The IMA’s ethical principles include honesty, fairness, objectivity, and responsibility Business Trends 1. Big Data a. Firms are collecting massive amounts of unstructured date that is used to make better business decisions b. You will need both technical and critical thinking skills to be able to sift through this data 2. Globalization a. Need more accurate and timely information b. Decide to expand into foreign countries or not c. New management techniques from international competitors 3. Lean thinking and Focus on Quality a. Philosophy and business strategy of operating without waste b. Less waste = lower costs c. Less wasted time = faster customer response time d. Six Sigma: Goal of producing near perfection 4. Sustainability, Social Responsibility, and Triple Bottom Line a. Ability to meet the needs of the present without compromising the ability of future generations to meet their own needs b. Three pillars: Social, Environmental, and Economic c. Triple Bottom line: Recognize a company’s performance should be viewed in terms of profit, people, and planet.

Chapter 2: Building Blocks of Managerial Accounting Three Different Views 1. Over the Value Chain a. Consider all costs incurred across the value chain i. Consider non-manufacturing costs b. Must ensure price covers all costs plus returns a profit c. Research and Development, Design, Production, Marketing, Distribution, Customer Service i. Production includes all costs or resources used by manufacturers to produce a product d. Focus on Manufacturing Costs i. Direct manufacturing costs 1. Direct materials – cost of materials that can be traced easily to a unit of output and are of significant economic consequences to the final product. 2. Direct Labor – labor costs that can be traced easily to the creation of a unit of output 3. Prime Costs = Direct materials + Direct Labor ii. Indirect Manufacturing Costs 1. Indirect materials – materials that are not readily traceable and that have minimal economic value in the cost of materials for the product 2. Indirect Labor – Those who are working on the factory floor but who are not involved in actually making the product a. A factory supervisor or custodian 3. Conversion Costs = direct labor + manufacturing overhead e. The cost of a unit is the sum of the amount i. Direct Materials (Traceable cost) ii. Direct Labor (Traceable cost) iii. Manufacturing Overhead (Allocated cost) 2. The Financial Statement View a. Product costs (Inventorial costs) i. All manufacturing costs incurred to produce the volume and mix of products made during a period. ii. Remain in inventory balance sheet accounts until products are sold b. Period costs i. All non-manufacturing costs (selling, general and administrative costs) incurred in a period whose benefits cannot be easily matched with the products or services sold in that period. 3. By Cost Behavior a. Variable costs i. Those that vary with production or sales volume (e.g. direct labor) b. Fixed costs i. Those that do not vary with production or sales volume (e.g. depreciation) c. Mixed costs i. Those that contain both fixed and variable costs d. Cost structure i. The relative proportions of fixed and variable costs that make up the total costs of an organizational unit

Total Cost = Total fixed cost + (Variable cost per unit x Number of units) Average Cost = Total Cost / Number of units = (Fixed costs / Number of units) + variable cost per unit Marginal cost = Cost of making one additional unit Relevant Costs a. Those costs that differ across alternative courses of action Opportunity Costs a. The sacrifice you make when you use a resource for one purpose instead of another Sunk costs a. Those costs necessary for an activity that cannot be reversed or recovered if the activity ceases Controllable Cost 1. One that is primarily subject to the influence of the manager Raw Materials Beginning Balance Purchases of Materials

Direct Materials Indirect Materials

Use of Materials

Ending Balance

Actual MOH

Manufacturing Overhead Indirect Materials Allocated MOH Indirect Labor Other MOH Work in Process

Total Manufacturing Costs to Account for

Beginning Balance Direct Materials Direct Labor Manufacturing Overhead Ending Balance

Cost of Goods Manufactured (COGM)

Finished Goods Total Available for Sale

Beginning Balance COGM Ending Balance

COGS

Chapter 3: Job Costing Scheduling Production  Production process starts when management decides to produce a batch of units  Production is based on a production schedule o Indicates quantity and types of inventory scheduled to be manufactured during the period Purchasing Raw Materials  Production engineers prepare a bill of materials for each job  Manager asks “Do we have required raw materials?” o If not, need to purchase raw materials  Purchase order: o Purchasing department issues to suppliers to order any parts not in stock  Receiving report o Incoming raw materials are counted and recorded on receiving report  Invoice o Bill from the supplier  The proper and timely reconciliation of these three documents (before payment is made) is crucial for safeguarding assets against theft and unauthorized use Job Cost Record  Tracks direct materials, direct labor, and manufacturing overhead for each job  Shows the number of units produced and the cost per unit  Provides supporting detail for jobs in work in process/finished goods inventory Job Cost Record: Direct Materials  Every job cost record is associated with one or more materials requisition records  Every individual materials requisition record will typically trigger a journal entry  Journal Entry for posting direct materials to job cost record: Work in Process Inventory Raw Materials Inventory

XXX XXX

Job Cost Record: Direct Labor  No inventory account  Costs charged may not fully reflect actual labor costs. Employee benefits are often included in MOH  Journal entry for posting direct labor to job cost record: Work in Process inventory Wages Payable

XXX XXX

Journal Entries for recording MOH: Indirect Materials Manufacturing Overhead Raw Materials Inventory

XXX

Manufacturing Overhead Wages Payable

XXX

Manufacturing Overhead Accumulated Depreciation Accounts Payable Prepaid Plant Insurance

XXX

XXX

Indirect Labor XXX

Other MOH XXX XXX XXX

Allocating Manufacturing Overhead  Indirect manufacturing costs that must be allocated to jobs o Splitting up, dividing total manufacturing overhead costs among the jobs produced during the year

Total Estimated amount of allocation base ¿ Predetermined MOH Rate = Total estimated manufacturing overhead costs ¿ Allocated MOH = Actual amount of allocation base x Predetermined MOH **The allocation base should be the cost driver of the manufacturing overhead – the primary factor that causes or drives cost Journal entry for posting MOH to job cost record: Work in Process Inventory Manufacturing Overhead

XXX XXX

**Example Journal Entries on page 8 of slides The Journal Entries – Completion of Jobs Finished Goods Inventory Work in Process Inventory Cost of Goods Sold Finished Goods Inventory

XXX XXX XXX XXX

**There is often a difference between actual MOH and allocated MOH, which needs to be adjusted If it has a debit balance: Cost of Goods Sold XXX

Manufacturing Overhead

XXX

1. A debit balance in manufacturing overhead means that it is under allocated 2. A credit balance in manufacturing overhead means that it is over allocated Chapter 4 – Activity-Based Costing, Lean Operations, Costs of Quality 1. Inventory Valuation – under GAAP manufacturers must allocate periodic production costs to all items produced 2. Operational Control – accurate, timely feedback to managers on their performance 3. Product cost – measure the resources consumed to design, produce, market, deliver products to consumers, and provide after sales service Cost Distortion 1. Cost distortion a. Occurs when some products are overcosted while others are undercosted by the cost allocation system 2. Overcosting a. A product consumes a low level of resources, but is allocated high costs per unit 3. Undercosting a. A product consumes a high level of resources, but is allocated low costs per unit Plantwide Overhead Rate a. Simple and inexpensive to use, but assumes that factory overhead costs are consumed on the same way by all products Departmental Overhead Rates a. Different departments have different amounts and types of MOH costs b. Multiple predetermined Overhead rates c. Multiple Overhead cost allocations d. Still highly inaccurate because departments largely reflect the organizational hierarchy of an organization as opposed to its economics Activity-Based Costing (ABC)  Recognizes that firms incur overhead costs because they perform various activities to produce, deliver and service products  Should consider all costs that exist to support the production and delivery of goods and services  An effective system to measure product costs must identify and assign to products all costs that vary with changes in the design, mic and range of products and customers Four steps of ABC 1. Identify primary activities and estimate total MOH costs associated with each activity 2. Select an allocation base for each activity and estimate the total amount that will be used during the year 3. Calculate activity cost allocation rates 4. Allocate some of the MOH from each activity to the individual jobs that use the activities Typical Differences 1. Low Volume products  undercosted  ABC increases unit cost

2. High Volume Products  overcosted  ABC decreases unit cost Activity based Management (ABM)  An extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making Value-Added Activities 1. Activities for which the customer is willing to pay add value to final product a. Manufacturing Company i. Engineering design, Machining services, assembly and painting b. Service Company i. Performing surgery ii. Legal Research iii. Delivering packages c. These activities should be optimized Non-Value-Added Activities 1. Activities that add cost to, or increase the time spent on, a product/service without increasing its market value a. Manufacturing Company i. Repair of machines, storage of inventory, moving of inventory, building maintenance, inspections, Inventory control b. Service Company i. Taking appointments, Reception, Bookkeeping, Traveling, and advertising Lean Manufacturing  Eliminate the waste of time and money that accompanies large inventories  Emphasis on Quality o Prevention Costs  Incurred to avoid producing poor quality goods or services o Appraised costs  Incurred to detect poor quality goods or services o Internal failure costs  Incurred on defective units before delivery to customers o External failure costs  Incurred because defective goods or services are not detected until after delivery to customers  Just-in-time, smaller batches, reduced setup times, self-contained

Chapter 6: Cost Behavior Three types of cost behavior 1. Variable costs: costs that are incurred for every unit of volume a. Total Variable costs change in direct proportion to changes in volume b. Graphs always begin at origin c. Slope represents the variable cost per unit of activity Variable cost line: y = vx  Y = total variable cost  V = variable cost per unit of activity  X = volume of activity 2. Fixed costs: costs that do not change despite changes in volume a. Graphs are flat lines that intersect y-axis b. Includes both committed and discretionary fixed costs c. Fixed cost per unit is inversely proportionate to volume Fixed cost line: y = f  Y = total fixed cost  F = fixed amount over a period of time 3. Mixed costs: contain both variable and fixed cost components a. Increases with volume b. Does not start at the origin c. Total mixed costs increases when volume increases, but not in direct proportion Mixed Cost line: y = vx + f  Y = total mixed costs  V = variable cost per unit  X = volume of activity  F = fixed cost component



()

y vx + f f = = +v x x x Average cost per unit goes down as volume increases because the per unit fixed cost goes down

Average cost per unit:

Four methods for analyzing Cost Behavior 1. Account Analysis a. Using judgement to classify each general ledger accounts variable, fixed or mixed 2. Scatterplot a. Manually draw a line to estimate the cost equation b. Helps visualize the relationship between cost and volume

3. High-Low Method a. Fits a mixed cost line through the highest and lowest volume data points b. Discards all other data points 4. Regression analysis a. Statistical procedure for determining the line and cost equation that best fit all of the data points in the data set; “the line of best fit” b. Need to focus on three things: i. R-square 1. The higher the R-square, the stronger the relationship between cost and volume 2. Ranges from 0-1 a. R-Square > 0.8 – indicates very reliable cost equation b. 0.5 < R-Square < 0.8 – should be used with caution c. R-Square < 0.5 – indicated equation is not reliable ii. Intercept Coefficient 1. Represents fixed costs iii. X Variable 1 Coefficient 1. Variable costs Absorption Costing vs. Variable Costing 1. Absorption Costing a. All manufacturing-related costs (fixed and variable) are absorbed into the cost of the product b. Direct materials, direct labor and manufacturing overhead c. Required by GAAP and IRS 2. Variable Costing a. Only variable manufacturing costs are treated as product costs b. Only used for internal management purposes c. Often leads to better decisions: i. Shows incremental cost of manufacturing each unit ii. Operating income will not be affected by changes in inventory levels Comparing Operating Income 1. Inventory levels remain constant a. Absorption Operating Income = Variable Operating Income 2. Inventory levels increase a. Absorption Operating Income > Variable Operating Income 3. Inventory levels decrease a. Absorption Operating Income < Variable Operating Income Difference in Operating Income = (Change in inventory level, in units) x (Fixed MOH per unit)...