Managerial Accounting Notes PDF

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Contains in depth notes from every lecture. Includes charts, graphs, and diagrams. Class taken with professor Surprenant. ...

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Managerial Accounting Notes Just in time production (JIT)- Product is made once it is ordered. It's not stored anywhere. Salesmen tell shipping, shipping tells packaging, packaging tell manufacturers, etc. Saves a lot of money. Cannot have defects though, must be higher quality because it has already been ordered. Chapter 1 Product Cost- Costs of the goods purchased or manufactured for resale Period Cost- Non-Product costs, Identified with period of time incurred Inventoriable Cost- Cost added to inventory Product costs Costs incurred in manufacturing or acquiring finished product-> Inventory (Balance sheet)-> Inventory sold-> Cost of Good Sold (Income Statement) Balance Sheet- Inventory 1. Raw Materials, Cost of materials before product 2. Work In Progress, Labor, Lights, etc 3. Finished Goods Inventory 4. Inventory on balance sheet ● Service Companies do not have inventory, all costs are operating expenses Manufacturing Costs 1. Direct Material- Raw material after production a. Material consumed by manufacture b. Incorporated into finished product c. Easily traceable to finished product 2. Direct Labor a. Salaries, wages of those working directly on manufactured products 3. Manufacturing Overhead a. All other costs to manufacture b. Indirect material i. Material used, but not part of finished product c. Indirect Labor i. In the manufacturing process, but do not work directly on product ex: supervisor d. Other i. Depreciation of plant and equipment ii. Proper taxes iii. Electricity iv. Service department costs

Other terms 1. Conversion Costs a. Direct labor and overhead 2. Prime Costs a. Direct material and direct labor Nonmanufacturing costs- Period costs-> Goes to Income Statement 1. Selling Costs a. Costs necessary to secure order and deliver the product 2. Administrative Costs a. All executive organizational and clerical costs Service Companies Airline Example - Direct Material- Food, jet fuel, aircraft parts - Direct Labor- Wages of flight crew, - Overhead- Insurance Cost Behavior- Cost Driver Concept - Cost Driver= activity base - The activities that cause costs to be incurred - Ex: Activity= assembly labor - Cost Driver= - Quantity of products manufactured, and - Number of parts per product Variable and Fixed Costs - Variable Costs - Cost changes in direct proportion to change in activity level - Cost/unit does not change with activity level changes - Fixed Costs - Cost does not change as activity level changes - Cost/unit changes with change in activity level

Types of Fixed Costs 1. Committed a. Long-tem, cannot be significantly reduced in the short term b. Ex: Depreciation on buildings and equipment and real estate taxes 2. Discretionary a. May be altered in the short-term by current managerial decisions b. Ex: Advertising and research and development

Step-Oriented Cost Behavior Relevant range- range of activity where cots behavior is strictly linear Step-Variable Costs - Cost increases in small steps instead of continuously Step-Fixed Costs - Fixed over wide range of activity but jump to new amount as activity level moves outside the range Differential Cost/Revenue - Amount cost/revenue differs under two alternatives - Outsourcing cost vs. producing in-house Marginal Cost/Revenue - Additional cost/revenue when one additional unit is produced/sold - Often differs as production quantities change Opportunity Costs - Benefit sacrificed when choose alternative action - Go to Superbowl vs. scalp the tickets for $500 Sunk Costs - Costs incurred in the past - Cannot be changed by any current or future action - Therefore, irrelevant to all future decisions Contribution Income statement Sales Less: Variable expenses: Contribution Margin Less: Fixed Expenses Net Income Traditional Income Sales Less: COGS Gross Income Total Less: Operating Expenses: selling and administrative Operating Income Total Less: Non Operating income and expenses Net Income Total

Chapter 2 Product-costing system - Accumulates costs incurred in production process and assigns these costs to the final products - Products costs used for - Financial accounting - Managerial accounting - Cost management Job-order costing systems used when: 1. Many different products are produced each period 2. Products are manufactured to order 3. Unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job 4. For example; Boeing (aircraft manufacturing); Price Waterhouse coopers Job-order costing . Each distinct batch called a job or job order . Costs are assigned to each job . Costs of each job averaged over units of production in the job= average cost per unit Accumulating costs in job-order costing systems . DM+DL+MOH assigned to each production job - Are the inputs of the product-costing system - As costs incurred, added to WIP - Subsidiary ledger account assigned to each job- “job-cost record” - How are these costs accumulated? Direct Material - Materials requisition form (source document) - To authorize release of materials - Used by cost accounting - Transfer cost of raw materials from RM to WIP inventory acct - Enter DM cost on the job-cost record Direct Labor - Time Card/Sheet (Source Document) - Records time employee spends on each production job - Used by cost accounting - Adding direct labor costs to WIP inventory - Enter DL cost on the job-cost record

Manufacturing Overhead - More difficult to trace to jobs - Bear no obvious relationship to individual jobs or units of product, but must be incurred for production to take place - Therefore, must assign manufacturing overhead costs to jobs - Overhead application (absorption) Allocate Costs to individual jobs 1. Use predetermined OH rate= Estimated MOH cost/Estimated amount of allocation base (cost driver) 2. Allocate MOH to the job, applied MOH a. Predetermined OH rate x Job’s actual usage of the cost driver 3. Record allocated MOH to the Job Cost Record Chapter 3 COGM=DM+DL+MOH T-Accounts . WIP Inventory- DM, DL, and MOH all go on the left side, Finish products goes on right side of WIP Inventory . COGM goes to FG Inventory left side, COGS goes on right side . FG Inventory goes to COGS left side . COGS goes to Income Summary MOH is a “clearing account” For MOH actual is on the left side and the applied is on the right side, anything left over is thrown to COGS (Debit COGS, Credit MOH) Indirect Material does not go to WIP Activity-based absorption costing Two Stage Procedure 1. Identify Activity Costs Pools a. Identify significant activities b. Assign OH $$ to each activity c. OH assigned to each activity= “activity cost pool” 2. Cost Drivers a. Identify appropriate cost driver for each pool b. OH costs allocated from each activity cost pool to each product line i. Calculate the pool rate ii. Allocate in proportion to amount of cost driver product line consumed

Levels of Activity 1. Unit- machinery a. Activity required for each unit produced 2. Batch- setup, inspection, shipping, receiving a. Activity required for each batch of products 3. Product-level- engineering a. Support entire product line, but not performed for every unit or every batch 4. Customer- level- sales calls a. Relate to specific customers 5. Organization- sustaining- heating the factory a. Required for entire production Overcosting and Undercosting - Traditional product costing system may overcost or undercost product - Traditional costing uses one cost driver - Therefore, product using the one cost driver the most, assigned the most OH costs - Product using that one cost driver the least, assigned the least OH costs Disadvantages of Traditional Costing If present, traditional costing system likely to distort product costs - Non Unit-level activities - Unit-level cost driver (DL hours, machine hours, etc) cannot assign costs of non unit-level activities - Product Diversity - Single cost driver cannot assign OH costs when consumption ratios differ between activities Activity-Based Costing (ABC) - All direct costs, manufacturing and nonmanufacturing, that can be directly traced to product - Ex, sales commissions, shipping, warranty - Plus all indirect costs, manufacturing and nonmanufacturing, caused aby product to be incurred - Ex, indirect material - And exclude: - Those manufacturing costs unaffected by which product made, “organization-sustaining” costs

Process Costing - Used for production of small, identical, low cost items - Mass pordu ed in automated continuous production process - Costs cannot be directly traced to each unit of product Process Costing - DM, DL, & Applied MOH charged as incurred to WIP for 1st production department - Costs transferred from 1st to 2nd production department or FG based on: - Cost per “Equivalent unit” - Using a weighted average method - Dept. Production Report - Cost per unit= Total Costs of Dept/ number of units produced

Conversion Costs= L+MOH EWIP= Ending work in progress, products that are left uncompleted Equivalent Units= units transferred + WIP Ending

Costs accounted for= Cost of EWIP + Cost of Units transferred out Costs to be accounted for= Cost of Beginning WIP + Cost incurred Exam 1- Review 25- Multiple choice, 9 points each= 225pts 1 Problem, 75 points Covers Chapter 1----- 4 questions Chapter 2+3-- 7 questions Chapter 4------ 8 questions Chapter 7+2A-- 6 questions Things to go Over for Exam Chapter 1 - Period Cost - Product Cost - Service Company - Manufacturing Costs - Direct Material - Direct Labor - Manufacturing Overhead - Indired material - Indirect labor - Other - Conversion Costs - Prime costs - DM= Beg RM+RM Purchased - Ending Raw Material

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Total Manufacturing Costs= DM+DL+OH COGM= Beg WIP+TMC - Ending WIP COGS= Beg FG+COGM - Ending FG Variable Costs - Total changes in direct proportion to activity level - Unist cost is constant Fixed Costs - Total is constant - Unit cost changes with change in activity level Direct vs Indirect Costs Controllable vs Uncontrollable Opportunity costs Out-of-pocket costs Sunk costs Differential costs Marginal Costs Average Costs

Chapter 2+3 - Process costing vs. job-order costing - Job-order costing - Acquisition of RM - debit RM inventory - DM - Release materials for production - Materials Req’tn Form - Debit WIP, Credit RM Inventory - Enter on Job-cost record - DL Hours - Time cards - Debit WIP - Enter on job-cost - MOH - Indirect Material - When purchase - debit manufacturing supplies inventory - When used in production - debit MOH, credit MFG supplies inventory - Indirect Labor Hours - Debit MOH - Other MOH costs - Debit manufacturing overhead - Factory rent - Factory depreciation, etc - No entry on job cost record - Apply MOH

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Predetermined OH rate - Budgeted MOH cost/Budgeted cost driver - Apply OH to job - Predetermined OH rate * actual cost driver - Debit WIP - Credit MOH - Record allocated MOH on job cost record Complete Job - Debit FG inventory - Credit WIP Inventory Sale of Goods - Debit CGS - Credit FG inventory - Compare Actual MOH incurred to applied OH - Difference - over(under) applied to CGS at end of period - Overapplied→ applied > actual Actual Costing System - MOH - Less timely, computed at end of accounting period

Chapter 4 Process costing system - Costs accumulated by department - Manufacture identical units - Unit cost = total costs incurred in one period/ units of output during that period Equivilent Units - Expressed in fully completed units - Partially completed units are smaller number of fully completed units - Eus = number of partially completed units in process * % complete - Example - 1,000 units in EWIP - 100% complete for DM - 75% complete for conversion - 1000 Eus for DM, 750 for conversion

Chapter 7 and Appendix 2A . ABC overhead allocation - Old way (job-order) uses single, volume-based cost driver - ABC uses rates based on pools/types of OH costs and their cost driver . Steps 1. Identify pools 2. Determine cost driver of pool 3. Calculate pool rate 4. Allocate costs to product line . Overcosting and Undercosting - Traditional system uses on cost driver vs. ABC usually >1 - Under traditional, product using the most/least of that cost driver assigned the most/least OH - Under traditional costing - If complex product and/or low volume, generally undercosted - underpriced - If simple product and/or high volume generally overcosted - overpriced . Level of Activity 1. Unit - machinery a. Activity required for each unit produced 2. Batch - setup, inspection, shipping, receiving a. Activity required for each batch of products 3. Product - level- engineering a. Support entire product line b. Not performed for every nit or batch 4. Customer- level -sales calls a. Relate to specific customers 5. Organization- sustaining- heating the factory a. Required for entire production

Chapter 5 Cost-Volume-Profit Analysis Estimate how profits are affected by: 1. Selling prices 2. Sales volume 3. Unit variable costs 4. Total fixed costs 5. Mix of products sold

Key Assumptions of CVP Analysis - Selling price is constant - Costs are linear and can be accurately divided into variable and fixed elements - In multiproduct companies, the sales mix is constant - In manufacturing companies, inventories do not change (units produced = units sold) Break-Even Point 1. What is the Break-Even Point a. Volume of activity where revenues = expenses b. 0 profit (loss) c. Once, reached net operating income will increase by the unit contribution margin for each additional unit sold Contribution Margin Approach Total Revenues - Variable expenses= Total contribution Margin - Revenue left to pay fixed expenses 1. Calculate Unit Contribution Margin a. Revenue per unit - Variable cost per unit= Unit contribution margin 2. Calculate Break-Even point in units a. Fixed expenses/Unit Contribution margin = Break-even Point in units Break-even point in sales dollars 1. Calculate contribution margin ratio a. Unit contribution margin/Unit sales price = Contribution Ratio 2. Calculate break-even point in sales dollars a. Fixed expenses/Contribution ratio = Break-even point in sales dollars Equation Approach - Sales revenue - Variable exp. - Fixed exp = profit - (Unit sales price x sales volume in units) - (Unit variable expense x Sales volume in units)- Fixed expenses= 0 for break even point - CM per unit x Sales volume = fixed expenses Target Net Profit - What is a target net profit? - Desired profit level - Three approaches to determine - Contribution margin - Equation - Graph

Contribution Margin approach for profit 1. Fixed expenses + Target net profit/ unit contribution margin= Sales units needed to earn target net profit 2. Fixed expenses + Target net profit/ Contribution margin ratio= Sales dollars needed to earn target net profit Equation Approach for target profit 1. Sales revenue - variable expense - fixed expense= profit 2. (Unit sales price x sales volume in units) - (Unit variable expense x Sales volume in units)- Fixed expenses= Target Net Profit 3. (CM per unit x Sales volume) - fixed expenses = Target Net Profit

Changes in Fixed Expenses Fixed Expenses x (1+ increase)/Unit contribution margin= Break-even point in units Donation to offset Fixed expenses Fixed expenses - donation/ Unit contribution margin= Break-even point in units Changes to CM Fixed expenses/New unit contribution margin= Break-even point in units Safety Margin Budgeted Sales Revenue - Break-even sales Revenue= Safety Margin Multiple Products 1. Determine Sales mix a. Proportion (%) of each product sold 2. Calculate Total CM Ratio 3. Calculate BEP in Sales Dollars a. Fixed expenses/CM Ratio 4. Allocate break-even point to each product a. Break-even point x % of products sold Cost Structure - Relative proportion of fixed and variable costs - Significant effect on sensitivity of profit to changes in volume - High VC % - low % increase in profit - High FC % - high % increase in profit - The greater the proportion of fixed costs, the greater the impact on profit from change in sales revenue

Operating Leverage - Ability to generate increase in ent income when revenue increases - Extent to which company uses fixed costs in its cost structure - Operating leverage greatest in companies with large proportion of FC, low VC, resulting in high CM ratio 1. Operating Leverage Factor = CM/Net Income 2. % Change in Net Income= % Change in Sales Revenue x Operating Leverage Factor Decentralization and Segment Reporting A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data Segment reporting used to: - Analyze profitability by segment - Make decisions - Measure performance of segment managers - Required by US GAAP and IFRS Segmented Income Statements 1. A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin 2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin. 3. Allocation of Common Costs e.g., Salary of Company President a. Incurred to benefit more than on segment b. Often not traceable to activities of the segment c. Would remain even if segment eliminated d. Therefore, not allocated to segments on segmented I/S Break-even Sales for Company= Total FC/Total CM Ratio Break-Even Sales for Business Prod= Segment Traceable FC/Segment CM Chapter 8 Budgeting- detailed plan, in quantitative terms, that specifies how resources will be acquired and used ruing specified period of time Master budget - Comprehensive profit plan that ties together all phases of operations - Includes many separate, interdependent budget - Steps: 1. Sales forecasting 2. Operational budgets 3. Cash Budget 4. Budgeted financial statements

Step 1- Sales Forecasting - Historical sales - Economic trends - Political and legal events - Pricing policy - Planned advertising and promotions - Competitors - New products Step 2- Operational Budgets - Based on sales budget - Enumerates how operations will meet demand for goods or services - Variable selling and administrative expenses budget - Production budget- how many units need to be produced during the budget period - Direct materials budget - Direct Labor budget - Manufacturing overhead budget

Schedule 1- Sales budget - Projected Sales Budget x unit price= Revenue Schedule 2- Production budget - Projected sales units + ending inventory units= Total units required - Total units required - beginning inventory units= units to be produced Schedule 3- Direct Materials Budget - Units to be produced x raw material required per unit= raw material required for production - Raw material required for production + Ending Inventory of raw material= total raw material required - Total raw material required - beginning raw material= raw material units to be purchased - Raw material units to be purchased x unit price= total cost of RM Schedule 4- Direct Labor Budget - Units to be produced x DL hours required per unit= total direct labor hours required - Total direct labor hours required x DL cost per hour= total direct labor cost Schedule 5- MOH Budget 1. Usage of cost driver x variable OH rate per cost driver= variable OH 2. Plus fixed OH 3. Total Manufacturing Overhead 4. Less Depreciation = Total Cash Disbursements for manufacturing overhead Schedule 6- Ending Finished Goods Inventory Budget - Just shows the budgeted costs of finished goods, production budget Schedule 7- Selling and Admin Expense Budget - Planned Selling & Admin during budget period - Divided into variable and fixed cost components 1. Variable Selling & Admin based on budgeted sales units 2. Plus fixed Selling & Admin 3. Total Selling & Admin expenses 4. Less Depreciation = Total Cash Disbursements for Selling & Administrative expenses Step 3- The Cash Budget 1. Cash receipts section lists all cash inflows excluding cash received from financing 2. Cash disbursements section consists of all cash payments excluding repayments of principal and interest 3. Cash excess or deficiency section determines if the company will need to borrow money or if it will be able to rep...