Management Accounting Cheat Sheet PDF

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Summarised cheat sheet with key concepts from the course - useful for an open-book exam or quick revision!...

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Cost Concepts Product Cost: DL + DM + MOH Period Cost: Selling and Administrative Expense Prime Cost: DM + DL Conversion Cost: DL + MOH (Cost to convert materials into finished products) High – Low Method (To find variable cost) 𝐶𝑜𝑠𝑡 𝑎𝑡 𝐻𝑖𝑔ℎ−𝐶𝑜𝑠𝑡 𝑎𝑡 𝑙𝑜𝑤 HL Method = = 𝐻𝑖𝑔ℎ 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙−𝐿𝑜𝑤 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙

Flexible Budget and Performance Analysis Activity Variance: Flexible Budget revenues & expenses – Planning Budget revenues & Expenses Revenue Variance: Actual Revenue – Flexible Budget Revenue Spending Variance: Actual Cost – Flexible Budget Cost *Fixed costs do not change with level of activity → Results in leverage effect

Managing Constraints 1. Working OT 2. Subcontracting some of the processing 3. Investing in additional machines 4. Shifting workers from non-bottleneck processes to bottleneck 5. Focusing business process improvement efforts 6. Reducing defective units processed

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙

Least-Squares Regression Method -Uses all of the data points to estimate fixed and variable cost components of a mixed cost Y = a + bX Job-Order Costing COGS = Units Sold x Units Cost = Beg Invt. + Purchases – Ending Invt.

Reasons for revenue variance: Selling price, product mix, discount structure, poor accounting controls Reasons for spending variance: Input prices, changes in usage, change in technology Standard Costs & Variances

POHR = * MOH costs include: Depreciation, Utilities, indirect materials and indirect labour

Activity-Based Absorption Costing Levels of Activity: 1. Unit Level 2. Batch Level 3. Product Level 4. Customer Level 5. Organization Sustaining – Do not relate to product or batch Activity Rate =

𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒂𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝑻𝒐𝒕𝒂𝒍 𝒂𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝒍𝒆𝒗𝒆𝒍

Master Budgeting *Refer to notes for template Advantages of Budgeting 1. Define goals and objectives 2. Think about and plan for the future 3. Means of allocating resources 4. Uncover potential bottlenecks 5. Coordinate activities 6. Communicate plans Responsibility Accounting – Managers should be held responsible for only those items that they can actually control to a significant extent. Enables organizations to react quickly to deviations from their plans and to learn from feedback Self-imposed Budget – A budget that is prepared with the full cooperation and participation of managers at all levels *Refer to notes for advantages

(𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒅 𝑹𝑶𝑰 𝒙 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕)+ 𝑺&𝑨 𝒆𝒙𝒑𝒆𝒏𝒔𝒆𝒔 𝑼𝒏𝒊𝒕 𝒔𝒂𝒍𝒆𝒔 𝒙 𝑼𝒏𝒊𝒕 𝒑𝒓𝒐𝒅𝒖𝒄𝒕 𝒄𝒐𝒔𝒕𝒔

Target Costing -Process of determining the maximum allowable cost for a new product Target Cost = Anticipated Selling Price – Desired Profit CVP Analysis CM = Sales Revenue – Variable Expenses 𝐶𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑀 CM ratio = 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 = 𝑆𝑃 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑀𝑂𝐻 𝑓𝑜𝑟 𝑐𝑜𝑚𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝑏𝑎𝑠𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑐𝑜𝑚𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑

Disposition of U/A or O/A overhead balances -Overapplied OH is deducted from Cost of Goods Sold -Underapplied OH is added to Cost of Goods Sold

Pricing Products and Services Determining Mark-up Percentage =

Net Operating Income = CM – Fixed Costs 𝑉𝐶 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑇𝑜𝑡𝑎𝑙 𝑉𝐶 Variable Expense ratio = 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 = = 1- CM Ratio Management by Exception: If either the quantity or cost of inputs departs significantly from the standards, managers will investigate the discrepancy to find the cause of the problem and eliminate it → Due to inconsistent variance Advantages of Standard Costs: 1. Provide benchmarks that promote economy and efficiency 2. Can support responsibility accounting systems 3. Can greatly simplify bookkeeping 4. Key element of the management by exception approach Potential Problems with Standard Costs 1. Standard cost variance reports are usually prepared on a monthly basis and may contain information that is outdated 2. If variances are misused as a club to negatively reinforce employees, morale may suffer and employees may make dysfunctional decisions 3. Labor variances assume that the production process is labor-paced and that labor is a variable cost. These assumptions are often invalid in today’s automated manufacturing environment where employees are essentially a fixed cost 4. Just metting standards may not be sufficient; continuous improvement may be necessary to survive in a competitive environment 5. In some cases, a “favorable” variance can be as bad or worse than an unfavorable variance 6. Excessive emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction

Unit sales to attain target profit =

𝑆𝑃 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑇𝑎𝑟𝑔𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡+𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 𝐶𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Performance Measurement in Decentralized Organizations Advantages of Decentralization 1. Top management freed to concentrate on strategy 2. Lower-level decisions often based on better information 3. Lower-level managers can respond quickly to customers 4. Lower-level managers gain experience in decisionmaking 5. Decision-making authority leads to job satisfaction

Disadvantages 1. Lower-level managers may make decisions without seeing the “big picture” 2. May be a lack of coordination among autonomous managers 3. Lower-level manager’s objectives that clash with those of the organization

𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

Dollar Sales to Breakeven = 𝐶𝑀 𝑟𝑎𝑡𝑖𝑜 Margin of Safety in Dollars = Total Sales – Breakeven Sales Degree of Operating Leverage =

𝐶𝑀 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒

*High operating leverage may be a result of high fixed cost

ROI 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 = Margin x Turnover = 𝐴𝑣𝑔 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠

*Net operating income is income before interest and taxes 𝑆𝑎𝑙𝑒𝑠 𝑁𝑂𝐼 Turnover = Margin = 𝑆𝑎𝑙𝑒𝑠

Key Assumptions of CVP Analysis 1. Selling price is constant 2. Costs are linear and can be accurately divided into variable and fixed elements 3. In multiproduct companies, sales mix is constant 4. In manufacturing companies, inventories do not change (Units produced = Units Sold) Differential Analysis Two broad categories of costs are never relevant in any decision: -Sunk Costs -A future cost that does not differ between the alternatives Advantages of Vertical Intergration 1. Smoother flow of parts and materials 2. Better quality control 3. Realize profits 4. Less dependent on external agents Disadvantages of Vertical Integration 1. Companies may fail to take advantage of suppliers who can create economies of scale Value of Constrained Resource -Increasing the capacity of a constrained resource should lead to increased production and sales Amount willing to pay = contribution margin per unit of constrained resource

𝐴𝑣𝑔 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠

Margin can be increased by: Increasing Sales, Decreasing Expenses Turnover can be increased by: Reducing excessive funds tied up in operating assets Residual Income = Net Operating Income – (Avg Operating Assets x Minimum RRR) *measures the excess returns Residual income encourages managers to make profitable investments that would be rejected by managers using ROI Delivery Performance Measures Delivery Cycle Time = Wait time + Throughput time *Throughput time is the same as manufacturing cycle time Throughput time = Process time + Inspection time + Move time + Queue time Manufacturing Cycle Efficiency (MCE) =

𝑉𝑎𝑙𝑢𝑒−𝑎𝑑𝑑𝑒𝑑 𝑡𝑖𝑚𝑒 𝑇ℎ𝑟𝑜𝑢𝑔ℎ𝑝𝑢𝑡 𝑡𝑖𝑚𝑒

*Value-added time = process time Transfer Pricing Three Approaches 1. Negotiated Transfer Prices 2. Transfers at the cost 3. Transfers at market price General Formula for negotiated transfer price Total CM on lost sales Transfer Price = Variable cost per unit +

Number of units transferred...