Managerial Accounting Final Exam Review PDF

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All lectures included, professor is George Boland. ...

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Managerial Accounting Final Exam Review Shannon Bailey

Chapter 1 Managerial accounting – the provision of accounting information for a company’s internal users. Not bound by GAAP or IFRS, and has three objectives: 1. Provide info for planning the organization’s actions 2. Provide info for controlling the organization’s actions 3. Provide info for making effective decisions Financial accounting – primarily concerned with producing information for external users, including investors, creditors, customers, suppliers, gov’t agencies etc. Total quality Management – manufacturers strive to create an environment that will enable workers to manufacture perfect (0 defect) products Chapter 2 Cost – the amount of cash or cash equivalent sacrificed for goods/services that are expected to bring a current or future benefit to the organization Expenses – expired costs Price – revenue per unit Accumulating costs – the way that costs are measured and recorded Assigning costs – the way that a cost is linked to some cost object Cost object – any item such as a product, customer, dept., project, plant, etc for which costs are measured and assigned Direct costs – those costs that can be easily and accurately traced to a cost object Indirect costs – costs that cannot be easily and accurately traced to a cost object Allocation – means that an indirect cost is assigned to a cost object by using a reasonable and convenient method Variable cost – one that increases in total as output increases and decreases in total as output decreases Fixed cost – a cost that does not increase in total as output increases and does not decrease in total as output decreases Opportunity cost – the benefit given up or sacrificed when one alternative is chosen over another, never included in accounting records -manufacturing organizations produce products, service organizations provide services Direct materials (DM) – those materials that are a part of the final product and can be directly traced to the goods being produced. Must be easily traceable/recognizable and reflect a significant portion of the total cost of the product. i.e. glue used to produce a TV might be so small that should be allocated as a factory OH cost Direct labour (DL) – the labour that can be directly traced to the goods being produced. Must be easily traced to production and reflect a significant portion of the total cost of the product Manufacturing overhead (MOH) – costs that cannot be traced to the cost object of interest, such as depreciation on buildings and equipment, janitorial and maintenance

labour, plant supervision, materials handling, power for plant utilities, and plant property taxes -total product cost = DM + DL + MOH Prime cost = DM + DL Conversion cost = DL + MOH -the cost of converting raw materials into a final product Period cost – all costs that are not product costs, like the cost of office supplies, R & D, selling & admin, CEO’s salary, and advertisements -if a period cost is expected to provide an economic benefit beyond the next year, it is recorded as an asset (capitalized) and allocated to expense through depreciation throughout its useful life Selling cost – the costs necessary to market, distribute, and service a product or service Administrative costs – all costs associated with R&D, and general admin of the organization that cannot reasonably be assigned to selling or production Materials inventory – consists of the costs of the direct and indirect materials that have not entered the manufacturing process Work-in-process (WIP) inventory – consists of the direct materials, direct labour, and factory OH costs for products that have entered the manufacturing process but are not yet completed, regardless of level of completion Finished goods inventory – consists of completed products that have not yet been sold Cost of goods manufactured – the total cost of making products that are available for sale during the period Making a Statement of Cost of Goods Manufactured: 1. Determine the cost of direct materials used: Materials inventory, Jan 1st 2012 $65 000 Plus materials purchased 100 000 Cost of goods available for use 165 000 Less materials inventory, Dec 31 2012 (45 000) Cost of Direct Materials used $120 000 2. Determine the total manufacturing costs incurred: Cost of direct materials used $120 000 All direct labour 210 000 All factory overhead 70 000 Total manufacturing costs incurred $400 000 3. Determine the cost of goods manufactured: Total manufacturing costs incurred $400 000 WIP inventory, Jan 1st 2012 50 000 Total manufacturing costs 450 000 Less WIP inventory, Dec 31st 2012 (80 000) Cost of goods manufactured $380 000 Statement of Cost of Goods Manufactured For the year ended December 31st, 2012

Materials inventory, Jan 1st 2012 $65 000 Plus materials purchased 100 000 Cost of goods available for use $165 000 Less materials inventory, Dec 31 2012 (45 000) Cost of Direct Materials used $120 000 Plus direct labour 210 000 Plus factory overhead 70 000 Total manufacturing costs incurred $400 000 Plus WIP inventory, Jan 1st 2012 50 000 Total manufacturing costs $450 000 Less WIP inventory, Dec 31st 2012 (80 000) Cost of goods manufactured $380 000 Beginning inventory of materials + purchases – direct materials used in production = ending inventory of materials Gross margin – the difference between sales revenue and cost of goods sold (gross margin percentage = gross margin / sales revenue) Chapter 3 – Cost Behaviour Cost behaviour – the general term for describing whether a cost changes when the level of output changes Cost driver – a causal measurement that causes costs to change Relevant range – the range of output over which the assumed cost relationship is valid for the normal operations of a firm Fixed costs – costs that in total are constant within the relevant range as the level of output increases or decreases. Unit fixed cost varies inversely with changes in activity throughout relevant range Discretionary fixed costs – fixed costs that can be changed or avoided relatively easily at management discretion i.e. advertising cost Committed fixed costs – fixed costs that cannot be easily changed, often involving a long term contract i.e. leasing machinery, purchase of property Variable costs – costs that in total vary in direct proportion to changes in output within the relevant range. Variable unit cost is fixed throughout relevant range. Total variable costs = variable rate x amount of output

Mixed costs – costs that have both a fixed and a variable component Step cost – displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point, where it remains for a similar range of output

For separating mixed costs into fixed and variable components: Total cost = fixed cost + (variable rate x output) Dependent variable – a variable whose value depends on the value of another variable; in this case, total cost is the dependent variable Independent variable – a variable that measures output and that explains changes in the cost or another dependent variable, in this case it is the output Intercept – corresponds to fixed cost Slope – corresponds to the variable rate High-low method – a method of separating mixed costs into fixed and variable components by using just the high and low data points Step 1: find the high point and the low point for a given data set; the high point has the highest activity/output level and the low point has the lowest (NOT THE HIGHEST AND LOWEST COSTS) Step 2: Using the high and low points, calculate the variable rate: Variable rate = high point cost – low point cost High point output – low point output Step 3: Calculate the fixed cost by using the variable rate and subbing in the values from either the high or low point: Fixed cost = total cost at high/low point – (variable rate x output at high/low point) Step 4: Form the cost formula for materials handling based on the high-low method i.e. Month January February March

Materials Handling Cost($) 2000 3090 2780

Number of Moves 100 125 175

April May June July August Septembe r

1990 7500 5300 3800 6300 5600

200 500 300 250 400 475

High point = (500 moves, $7500) Low point = (100 moves, $2000) Variable rate = 7500 – 2000 = 5500 = $13.75 per move 500 – 100 400 Total mixed cost = fixed cost + (variable rate x number of output) Fixed cost = Total mixed cost high – (variable rate x number of outputs high) Fixed cost = 7500 – (13.75 x 500) = $625 So Total cost = 625 + (13.75 x number of moves) -you can also try to find the cost formula using a scattergraph plot or method of least squares (regression) Chapter 4 – Cost Volume Profit Analysis Break-even point – the point where total revenue equals total cost (zero profit) Contribution margin income statement – the income statement format that is based on the separation of costs into fixed and variable components Contribution margin – the excess of sales over variable costs CM = sales – variable costs Contribution margin ratio – indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations Contribution margin ratio = contribution margin OR = CMunit Sales price Change in income from operations = change in sales dollars x CM ratio Unit contribution margin = sales price per unit – variable cost per unit Change in income from operations = change in sales units x unit CM Total fixed cost = Total Fixed Cost Price – Variable cost per unit CMunit Variable cost ratio – the proportion of each sales dollar that must be used to cover variable costs Variable cost ratio = variable cost per unit = 1 – CM ratio Price -if fixed cost is equal to contribution margin, then operating income is $0  BEP -if fixed cost is less than CM, then the company earns a profit -if fixed cost is greater than CM, then the company earns a loss Break even units =

Break-even sales = Total fixed expenses CM ratio BEP units + profit = fixed cost + target profit CMunit BEP sales + profit = Fixed cost + target profit CM ratio With income taxes:

[

BEP units = Fixed costs +

(desired earnings after tax)] / CM per unit

1 – tax rate = [FC + (NI/(1 – T))]/CMunit Profit volume graph – visually portrays the relationship between profits and units sold; is the graph of the operating income equation (operating income = (price x units) + (unit variable cost x units) – total fixed cost)

Cost volume profit graph – depicts the relationships among cost, volume and profits by plotting the total revenue line and the total cost line on a graph

Common fixed expenses – when you have multiple products, the fixed costs that are not traceable to the segments and would remain even if one were eliminated Sales mix – the relative combination of products being sold by a firm, measured in units i.e. A company sells two products, A and B, where A is priced at $400 and B is priced at $800. The variable cost per unit are $325 for A and $600 for B. The total fixed expense is $96 250, and the sales mix is 3A:2B Product Price Unit Variable Unit Contribution Sales Package Cost Margin Mix Contribution Margin 1 2 3 2–3 4 (2 – 3) 4 A $400 $325 $75 3 $225 B 800 600 200 2 $400 Package Total $625 Break even Packages = Total fixed Cost Package Contribution Margin Break even packages = 96 250 = 154 packages 625 Number of Product A = 154 packages x 3 = 462 A Number of Product B = 154 packages x 2 = 308 B Margin of Safety (MS) – the excess of budgeted or actual sales over break even sales, expressed in dollars, units, or percent of current sales MS = actual sales – break even sales MS% = MS/actual sales Operating leverage – the use of fixed costs to extract higher percentage changes in profits as sales activity changes Degree of Operating leverage (DOL) – contribution margin Operating income -the greater the DOL, the more that changes in sales will affect operating income Percent change in operating income = DOL x percent change in sales Chapter 5 – Job Order Costing Job order costing – where costs are assigned and accumulated by job  Wide variety of distinct products  Costs accumulated by job  Unit cost computed by dividing total job costs by units produced on that job Process costing – where firms accumulate production costs by process or by dept. for a given period of time  Homogenous products  Costs accumulated by process or department  Unit cost computed by dividing process costs of the period by the units produced in the period Job – one distinct unit or set of units

Actual costing – requires the firm to use the actual cost of all direct materials, direct labour, and overhead used in production to determine unit cost -the problem is overhead, many overhead costs are not incurred uniformly throughout the year and overhead does not have a direct relationship with production -even if a company adds all overhead costs and divides them by number of units, distorted costs may occur Normal costing – requires the firm to assign actual costs of direct materials and direct labour to units produced and to apply overhead to units based on a predetermined estimate -overhead can be estimated by approximating the year’s actual overhead at the beginning of the year and then using a predetermined rate throughout the year to obtain the needed unit cost information Steps to estimate overhead and apply to production: 1. Calculate the predetermined overhead rate Overhead rate = estimated annual overhead Estimated annual activity level 2. Apply Overhead to Production Applied overhead is found by multiplying the predetermined overhead rate by the actual use of the associated activity for the period 3. Reconcile applied overhead with actual overhead or allocate applied overhead to WIP and Finished goods ending inventories -if actual overhead is greater than applied overhead, then the variance is called underapplied overhead -if actual overhead is less than applied overhead, the variance is called overapplied overhead -if the overhead is underapplied, debit COGS, and if the overhead is overapplied, credit COGS by the variance amount Plantwide overhead rate – a single overhead rate calculate by using all estimated overhead for a factory divided by the estimated activity level across the entire factory Departmental overhead rate – simply estimated overhead for a department divided the by the estimated activity level for that department -with normal costing, the unit cost is the total cost of the job (Materials, labour, and applied overhead) divided by the number of units in the job Degrees of Conversion in Firms:  Low degree of conversion – limited to adding convenience in terms of where, when, and in what quantities (packages) i.e. gas stations, travel agencies, hair salons  Moderate degree of conversion – small degree of conversion, usually just before delivery, such as when installing, packaging, washing, and labeling I.e. oil change stores, florists, butcher shops, car washes  High degree of conversions – the input is transformed greatly i.e. construction companies, restaurants, manufacturing companies Job-order cost sheet – is prepared for every job; is subsidiary to the WIP account and is the primary document for accumulating all costs related to a particular job

i.e.

Johnson Leathergoods Job-Order Cost Sheet Job Name: Backpacks Date Started: Jan 3, 20XX Date Completed: Jan 29, 20XX Direct Materials $1000 Direct Labour 1080 Applied Overhead 240 Total Cost $2320  Number of units 20 , Unit Cost $116 Materials Requisition form – the cost of direct materials is assigned to a job by the use of this source document Time tickets – used only for direct labourers to help calculate the costs of direct labour Cost flow – describes the way costs are accounted for from the point at which they are incurred to the point at which they are recognized as an expense on the income statement Normal cost of goods sold – the COGS before an adjustment for overhead variance Adjusted cost of goods sold – the result after the adjustment for the period’s overhead variance Typical Cost Flow Journal Entries: Transactions 1. Purchased raw materials costing $2500 on account 2. Requisitioned materials costing $1500 for use in production 3. Recognized direct labour costing $1350 (that is, it was not paid in cash) 4. Applied overhead to production at the rate of $2 per direct labour hour. A total of 170 direct labour hours were worked 5. Incurred Actual Overhead costs of $415 6. Completed the backpack job and transferred it to finished gods 7. Sold the backpack job at cost plus 50% 8. Closed underapplied overhead to COGS 1. Dr. Raw materials Cr. Accounts Payable 2. Dr. WIP Cr. Raw Materials 3. Dr. WIP Cr. Wages Payable 4. Dr. WIP Cr. Overhead Control 5. Dr. Overhead Control Cr. Lease Payable Cr. Utilities Payable Cr. Accumulated Dep. Cr. Wages Payable

$2500 $2500 $1500 $1500 $1350 $1350 $340 $340 $415 $200 $50 $100 $65

6. Dr. Finished Goods Cr. WIP 7. Dr. COGS Cr. Finished Goods Dr. Accounts Receivable Cr. Sales Revenue 8. Dr. COGS Cr. Overhead

$3290 $3290 $3290 $3290 $4935 $4935 $75 $75

Note:  Direct materials and direct labour are charged to work in process  Applied overhead costs are charged to WIP, while actual overhead costs are charged to overhead control  When units are completed, their total cost is debited to finished goods and credited to work in process  When units are sold, their total cost is debited to COGS and credited to finished goods

Chapter 6 – Process Costing Sequential processing – when units pass through one process before they can be worked on in later processes Parallel processing – another processing pattern that requires two or more sequential processes to produce a finished good Transferred-in costs – costs transferred from a prior process to a subsequent process; from the viewpoint of the subsequent process, transferred in costs are a type of raw material cost Production report – the document that summarizes the manufacturing activity that takes place in a process department for a given period of time. Five steps of a production report: 1. Physical Flow Analysis 2. Calculation of EUs 3. Computation of unit cost 4. Valuation of inventories (goods transferred out, EWIP) 5. Cost reconciliation Equivalent units of output – the complete units that could have been produced given the total amount of manufacturing effort expended for the period under consideration -the complicating factor in process costing is BWIP inventories; this represents work done in prior period: there are 2 methods for treating the BWIP inventories, FIFO, and weighted average # of EU = number of units x percentage complete

Weighted average costing method – combines beginning inventory costs and work done with current period costs and work to calculate this period’s unit cost; in essence, the costs and work carried over from the prior period are treated as if they belonged to the current period -always note when what costs are added. For example, if something is 60% complete, it does not mean that 60% of material, labour, and manufacturing overhead are all 60% complete, rather, all materials may be added but labour not yet performed. If not uniform, EU calculations must be done for each category of manufacturing input, and a unit cost is calculated for each category -major benefit is simplicity, but reduced accuracy in computing unit costs for current period output and beginning WIP FIFO costing method – separates work and costs of the EU in beginning inventory from work and costs of the EU produced during the current period. It is assumed that units from beginning inventory are completed & transferred out first. The cost of these units includes the cost of the work done in the prior period as well as the current period costs necessary to complete the units. Units started in the current period are divided into 2 categories: units started and completed and units started but not finished, and they are both valued using the current period’s cost per EU -if product costs do not change from period to period, or if there is no BWIP inventory, the FIFO and weighted average methods yield the sa...