Managerial Accounting Midterm 1 PDF

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Managerial Accounting Midterm Review ...

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Managerial Accounting Midterm 1 Prologue: Financial Accounting External Parties Historical Perspective Objectivity and Verifiability Precision Companywide Reports Follow GAAP/ IFRS and prescribed formats Mandatory for External • •

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Managerial Accounting Internal Parties: Managers Future Emphasis Relevance Timeliness Segment Reports Not bound Not Mandatory

Segment- cost, revenue, profit data 3 Vital Activities o Planning-establish goals, specify how to achieve them, develop budgets o Controlling-gathers feedback to compare actual results with budget o Decision Making-selection among competing alternatives ▪ What should we be selling? ▪ Who should we be serving? ▪ How should we execute? Ethics Perspective o Competence ▪ Professional expertise by continually developing knowledge and skills ▪ Perform professional duties in accordance with relevant laws, regulations, and technical standards ▪ Provide decision support information and recommendations that are accurate, clear, concise, and timely ▪ Recognize and communicate professional limitations or other constraint that would preclude judgment or successful performance of an activity o Confidentiality ▪ Do not disclose confidential information unless legally obligated to do son ▪ Does not use confidential information for unethical or illegal advantage ▪ Ensure that subordinates do not disclose confidential information o Integrity ▪ Mitigate conflicts of interest and advice others of potential conflicts ▪ Refrain from conduct that would prejudice carrying out duties ethically ▪ Abstain from activities that might discredit the profession o Credibility ▪ Communicate information fairly and objectively ▪ Disclose delays or deficiencies in information timeliness, processing, or internal controls ▪ Disclose all relevant information that could influence a user’s understanding of reports and recommendations

Chapter 1 Purpose of Cost Classification Assigning costs to cost objects

Cost Classifications Direct Cost- easily traced Indirect Cost-cannot be easily traced Accounting for costs in manufacturing Manufacturing Costs companies • Direct Materials • Direct Labor • Manufacturing Overhead Nonmanufacturing Costs • Selling Costs • Administrative Costs Preparing Financial Statements Product Costs-inventoriable Period Costs- expensed Predicting Cost behavior in response to Variable Cost- proportional to activity changes in activity Fixed Cost- constant in total Mixed Cost- has variable and fixed elements Making decisions Differential Cost-differs between alternatives (fixed or variable) Sunk Cost- already occurred costs and cannot be changed, should be ignored Opportunity Cost-foregone benefits • Direct Costs- costs that can be easily and conveniently traced to a unit of product o Direct Material- raw materials that become an integral part of the product o Direct Labor (Touch Labor) • Indirect Costs- costs that cannot be easily and conveniently traced to a unit of product o Common Costs-Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object o Manufacturing Overhead- all manufacturing costs except direct material and direct labor. Costs that cannot be readily traced to finished products, does not include selling or administrative expenses ▪ Indirect Materials ▪ Indirect Labor • Manufacturing Costs (Direct Materials, Direct Labor, Manufacturing Overhead) o Prime Cost= Direct Materials Cost + Direct Labor Cost o Conversion Cost= Direct Labor Cost + Manufacturing Overhead o Applied to WIP inventory during the period=DM+DL+MOH • Nonmanufacturing Costs o Selling Cost-necessary to secure the order and deliver the product, either direct or indirect costs o Administrative Cost-all executive, organizational, and clerical costs, either direct or indirect costs • Product Costs-manufacturing costs- all costs involved in acquiring or making a product (direct materials, direct labor, manufacturing overhead)

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o Raw Materials- includes any materials that go into the final product o Work in Process- consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer o Finished Goods Cost- Consists of completed units of product that have not yet been sold to customers Period Costs-nonmanufacturing costs- all selling costs and administrative costs Cost behavior-how a cost reacts to changes in the level of activity o Variable Cost- cost that varies, in total, in direct proportion to changes in the level of activity (Variable cost per unit remains constant) ▪ Activity Base-cost driver- Measures what causes the incurrence of a variable cost o Fixed Cost- Cost that remains constant, in total, regardless of changes in the level of the activity (Fixed cost per unit decreases as the activity level rises and increases as the activity level falls) ▪ Committed- long term, cannot be significantly reduced in the short term ▪ Discretionary- may be altered in the short-term by current managerial decisions o Mixed Cost- contains both variable and fixed elements

Traditional Income Statement- External Reporting Sales ($*Units) Cost of Goods Sold (beg materials+ purchase -end materials) Gross Margin Selling and Administrative Expenses Selling Expenses Administrative Expense Net Operating Income

A B A-B=C D E

Contribution Format Income Statement- Management Sales ($*Units) Variable Expenses Cost of Goods Sold (beg materials+ purchases- end materials) Selling Expenses Administrative Expenses Contribution Margin Fixed Expenses Selling Expenses Administrative Expenses Net Operating Income

A B

C D

G H

B+C+D=E A-E=F

G+H+I F-I

D+E=F C-F

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Quality of Conformance-Costs incurred to prevent defects or that result from defects in products are known as quality costs. Many companies are working to reduce their quality costs Internal Failure Costs- Incurred as a result of identifying defects before they are shipped External Failure Costs-Incurred as a result of defective products being delivered to customers

Chapter 2 •

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Job-Order Costing- different products produced each period, manufactured to order, requires tracing or allocating costs to each job o Charge direct material and direct labor costs to each job as work is performed o Manufacturing overhead (indirect materials and indirect labor) allocated to all jobs rather than directly traced to each job Allocation Base- used to assign manufacturing overhead to individual jobs o Impossible or difficult to trace overhead costs to particular jobs o Manufacturing overhead consists of many different items ranging from grease used in machines to production manager’s salary o Many types of manufacturing costs are fixed even though output fluctuates during the period Predetermined Overhead Rate (POHR, per direct labor-hour)=(a+bx)/x=est. total manufacturing overhead cost for coming period/ est. total units in the allocation base for coming period o Used because actual overhead not known until end of the period, thus inhibiting the ability to estimate job costs during the period o Actual overhead costs can fluctuate seasonally thus misleading decision makers Underapplied overhead-Less overhead to production than it actually incurs o Adjust by increasing cost of goods sold, decrease net operating income Overapplied overhead-More overhead to production than it actually incurs o Adjust by decreasing cost of goods sold, increase net operating income

Chapter 3 • •

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Job-Order Costing- used in situation where many different products, jobs, or services are produced each period Absorption costing-costing method that includes all manufacturing costs (direct materials, direct labor, both variable and fixed manufacturing overhead) in the cost of a product Allocation base- measure of activity such as direct labor-hours or machine hours that is used to assign costs to cost objects Predetermined overhead rate-rate used to charge manufacturing overhead cost to jobs that is established in advance for each period Overhead application-process of assigning overhead costs to specific jobs using the following formula

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o Predetermined overhead rate * Allocation base incurred by the job Normal costing-costing system in which overhead costs are applied to a job by multiplying a POHR by actual amount of allocation base incurred by the job Job Cost sheet-form that records direct materials, direct labor, and manufacturing overhead cost charged to a job Cost of Goods Manufactured-manufacturing costs associated with goods that were finished during the period o Beginning + Purchases – Ending Manufacturing Costs=Direct Materials + Direct Labor + Manufacturing Overhead o Applied to Work in Process inventory during the period

Cost of Goods Manufactured Direct material Raw Materials inventory, Beg Purchases of Raw materials Total raw materials available Raw Materials inventory, End Raw Materials Used in Production Indirect Materials included in manufacturing overhead Direct Labor Manufacturing overhead applied to work in process inventory Total manufacturing costs Beginning work in process inventory Ending Work in process inventory Cost of Goods Manufactured

A B A+B=C D C-D=E F

E-F=G H I G+H+I=J K J+K=L M L-M=N

Cost of Goods Sold Finished Goods Inventory, Beginning Cost of Goods Manufactured Cost of Goods Available for Sale Finished Goods Inventory, Ending Unadjusted cost of goods sold Underapplied (add) …... Overapplied (subtract) Adjusted cost of goods sold

A N A+N=B C B-C=D E D+E or D-E

Chapter 5 •

Cost-Volume-Profit Assumptions o Selling price is constant. Price of product or service will not change as volume changes

o Costs are linear and can be accurately divided into variable and fixed components. Variable costs are constant per unit, fixed costs are constant in total over entire relevant range o In multiproduct companies, mix of products sold remains constant Contribution Income Statement Total Per Unit Sales (#) A*# A Variable Expenses B*# B Contribution Margin (A-B)*#=C*# (A-B)=C Fixed Expenses D Net Operating Income (C*#)-D=E • Net Operating Income is zero-break-even point • Profit o (Sales-Variable Expenses)-Fixed Expenses o (P*Q-V*Q)-Fixed Expenses o (P-V)*Q-Fixed Expenses o Unit CM*Q-Fixed Expenses o (CM ratio*Sales-Fixed Expenses • Contribution Margin Ratio-% of sales o CM Ratio=(contribution margin)/sales o CM Ratio=(Sales-Variable Expenses)/sales o CM Ratio=1-(Variable Expense Ratio) o For each $1 increase, contribution margin increases by % • Variable Expense Ratio-% of sales o Variable Expense Ratio=(Variable Expenses)/Sales • Unit Sales to Break even=fixed/expenses o Set profit to 0 o Break even sales in $=(fixed expenses)/CM Ratio o Break even sales in units=(Fixed expenses)/CM per unit • Attain target profit o Unit Sales=(target profit + fixed expenses)/CM per unit o Unit $=(target profit + fixed expenses)/CM Ratio • Analysis of Mixed Costs o Account Analysis-classified as either variable or fixed based on the analyst’s knowledge of how the account behaves o Engineering Approach-classifies costs based upon an industrial engineer’s evaluation of production methods, and material, labor, and overhead requirements • High-Low method o Variable Cost per hour-maintenance is equal to the change in cost divided by the change in hours...