Managerial Accounting Study Guide and course outline PDF

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Managerial Accounting Study Guide and course outline...

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Managerial Accounting Exam Wednesday, October 7th, 2015 Class & Case Takeaways Journal Entry & T-account review (costs and flows) 1. The meaning of common cost classifications. 2. The basic journal entries of cost accounting. 3. What is a linear cost function? 4. Ways of estimating a linear cost function. Costs, Benefits, & Relevance 1. The meaning of relevance and an awareness of the sunk cost fallacy. 2. The concept of opportunity cost. 3. Basic allocation of indirect costs. Contribution Margin & Cost Estimation 1. The format of a contribution margin income statement. 2. Cost estimation techniques of high-low and regression. Cost-Volume-Profit (CVP) Analysis 1. Purpose and uses of CVP. 2. How to calculate breakeven in quantity and revenue. Case Exercise: Hallstead Jewelers 1. A practical application of the contribution margin approach to decision analysis. Multiple Product CVP 1. How to calculate weighted average contribution margin. 2. How to use CVP in a multi-product environment. 3. How enhancing simple CVP analysis can increase its value but also its complexity. Case Exercise: Seligram (ETO) 1. Cost allocation of overhead considering cost drivers. Activity-Based Costing (ABC) 1. What is activity-based costing (ABC) and why is ABC important? 2. How does ABC work? 3. What are some of the advantages and disadvantages of ABC? 4. What are the clues that tell me I need an ABC system? Class Material Outline Decision Making 1. Specify decision problem and goals. a. Remember: Individuals and organizations might have different goals

2. Identify options 3. Determine the value of each option a. Use the framework! 4. Make the decision (choose option with highest value) a. Data might be missing stuff, such as long-term effects Information to Consider in Decision Making 1. Given a set of decision options, accountants try to value the options a. Value = benefits – costs 2. Opportunity costs 3. Economic profit Relevance of Information 1. Relevant costs and benefits are those that differ across options a. 3 cell phone plans from different carriers b. $399 for phone + 2-yr contract c. Same min. and features, $83/mo., $95/mo., or $97/mo. i. Is cost of phone relevant? ii. Is cost of monthly plan relevant? iii. What other benefits might be relevant? Relevance and Sunk Costs 1. Sunk cost: past expenditure that can’t be changed a. Radar invisible plane example b. Opportunity costs are always relevant c. Sunk costs are never relevant Controllability 1. A controllable cost or benefit is one that the decision-maker chooses to incur relative to doing nothing a. Changes with time horizon i. Short term: fewer items are controllable ii. Long term: much more is controllable b. Example: Capacity costs c. So far, we have only looked at short horizons Cost 1. A cost is a measure of the resources consumed to provide a product or service a. Cost driver is an activity measure that is believed to be correlated with resource consumption b. Accountants’ job is to estimate the relationships between: i. Activities and products, services ii. Activities and resource consumption Direct Costs 1. Costs that can be easily and conveniently traced to a product or service.

2. Example: cost of paint in the paint department of an automobile assembly plant.

Indirect Costs 1. Costs that cannot be traced to a product or service. a. These costs are allocated b. Example: cost of national advertising for an airline is indirect to a particular flight Cost Allocations 1. What to do with indirect costs? 2. They are: a. A cost of providing products and services b. Hard to measure c. Needed to value inventory (product cost) at manufacturing firms 3. Most firms: want to consider indirect costs for decision-making How to Allocate Costs 1. Figure out how much cost to allocate (cost pool) 2. Figure out the activity that correlates to cost (cost driver) 3. Figure out what to allocate cost to (cost object) 4. Compute an allocation rate a. Estimated cost pool divided by estimated cost driver volume 5. Allocate the cost as the activity occurs Product Costs 1. If the cost will eventually flow through finished goods inventory, then it’s product cost a. Direct material b. Direct labor c. Manufacturing overhead Period Costs 1. Any cost that is not a product cost Why Differentiate between Product and Period Costs? 1. What’s the point of all this? a. We need to value inventory b. By matching principle, want to match revenues and expenses c. Costs of creating inventory are not expenses until the inventory is sold (by matching principle) d. Thus, indirect costs related to manufacturing become product costs i. All other costs matched to current period revenues (hence, period costs) Cost Flows in Merchandising and Service Firms

1. Merchandising firms a. Only have one inventory account. i. Product cost is invoice amount plus costs necessary to get inventory ready for sale (shipping costs) b. Service firms i. On a GAAP income statement (financial accounting perspective), all costs are period costs, because they are expenses in the period in which they occur. ii. For internal management purposes (managerial accounting perspective), service firms still will identify the cost of their product (service). iii. Only Direct Labor and OH are included in the cost of a company’s service. Review of Asset Account in Financial Accounting 1. BB + ADD – AAU = EB 2. If you know any 3 terms in the equation, you can solve for the fourth. 3. Many of the problems rely on this. Variability of Costs 1. If a cost changes with respect to some activity measure, the cost is variable with respect to that activity level. a. Otherwise it’s fixed b. Step costs can be treated as variable in some ranges, fixed in others 2. Will profit at gym increase if they add another 50 members? a. How much will revenues increase? b. How much will total cost increase? c. Will fixed costs increase? Will variable costs increase? d. Need to estimate cost behavior to figure out which costs are fixed and which are variable Estimating Cost Behavior using the Contribution Margin Statement

Cost Behavior 1. How do activities affect total costs? 2. Sometimes we have information about this relationship: a. Account classification method

b. Sometimes, we have to infer this based on past data: i. High-low method (parsimonious with data) ii. Regression (data intensive, but more robust) Regression 1. Predict future using model a. Other ideas: i. Relevant range, R2, p-values, coefficient signs, and magnitudes Cost-Volume-Profit (CVP) Analysis 1. We classified cost behaviors 2. We discussed methods for estimating cost behavior given historical data 3. CVP analysis a. As activity levels change, how do total cost and profit change? b. At what activity level do we “break even”? c. How sensitive are profits to changes in sales and costs? d. This is called cost-volume- profit (CVP) analysis i. As volumes change, how will costs and profits change? CVP Relationships 1. Total profit of the organization, Π a. Π = Revenue – FC – VC b. Π = (p – v) * q – FC = cm * q – FC 2. Special level of profit: Π = 0 a. Activity level at which this occurs is called breakeven volume. FC b. BEQuantity = cm i. Fixed costs divided by contribution margin per unit c. Can also use this to compute volume at which some target profit occurs (before or after tax) Multi-Product CVP 1. Assume fixed proportion of products sold (constant sales/product mix) 2. Use composite units or weighted unit contribution margin approach. 3. Use that to compute number of “average” units that need to be sold. 4. Then use proportions to back out quantities of each product. Activity-Based Costing (ABC) 1. Activity-based costing (vs. “traditional” costing) 2. ABC still uses cost pools and cost drivers but: a. “activities” are the basis of cost pools, rather than “departments” 3. Cost hierarchy organizes pools… a. Costs that are fixed at the unit level may be variable at the batch, product sustaining, or facility level b. Avoids “peanut butter” costing (spreading costs evenly over the cost object like peanut butter)

4. Activity-based pricing a. Customer profitability analysis 5. Activity-based management a. Analysis of activities in ABC can help to identify and eliminate non – valueadded activities (like Indianapolis eliminating supervisor salaries or selling unused vehicles) Case Material Outline Hallstead 1. Using CVP to make effective decisions 2. Difficult to analyze business with financial accounting formatted statements. 3. Identify fixed and variable costs 4. Use CVP for sensitivity analysis a. What happens to breakeven if I lower price? increase advertising? eliminate commissions? Seligram: ETO 1. ETO: Electronic component testing 2. Outdated costing system with one driver to allocate overhead 3. Two distinct types of services use indirect costs at different rates a. Separate indirect costs into 2 cost pools with appropriate driver for each. b. Improvement on identifying accurate costs per product and division, and improvement in company profitability. Textbook Problem Sets Chapter 1: 1.3, 1.4, 1.12, 1.26 and 1.35, 1.38, 1.47, 1.56, 1.62 Chapter 2: 2.1, 2.27, 2.29 and 2.33, 2.39, 2.40, 2.42, 2.45 Chapter 3: 3.28, 3.32, 3.34, 3.35, 3.42, 3.58 and 3.40, 3.46 Chapter 4: 4.34, 4.38, 4.44 and 4.41, 4.45 and 4.50, 4.47 Chapter 5: 5.30, 5.45, 5.41, 5.47, 5.42 and 5.49, 5.53, 5.61 Chapter 10: 10.33, 10.35, 10.38, 10.40...