Summary Managerial Accounting- Ray Garrison, Eric Noreen, Peter Brewer PDF

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Summary Managerial Accounting Ray Garrison, Eric Noreen, Peter Brewer 14th Edition

Contents 1. Managerial accounting: an overview .............................................................................................. 9 1.1. What is managerial accounting? .............................................................................................. 9 1.2. Why does managerial accounting matter to your career? ................................................. 10 1.3. What skills do managers need to succeed? .......................................................................... 11 1.3.1. Strategic management skills ............................................................................................ 12 1.3.2. Enterprise risk management skills .................................................................................. 12 1.3.3. Process management skills .............................................................................................. 12 1.3.4. Measurement skills........................................................................................................... 13 1.3.5. Leadership skills ................................................................................................................ 13 1.4. The importance of ethics in business .................................................................................... 14 1.5. Corporate social responsibility............................................................................................... 14 2. Managerial Accounting and cost concepts .................................................................................. 16 2.1. General cost accounting ......................................................................................................... 16 2.2. Product costs versus period costs ......................................................................................... 18 2.3. Cost classifications for predicting cost behavior ................................................................. 19 2.3.1. Variable cost...................................................................................................................... 19 2.3.2. Fixed cost .......................................................................................................................... 20 2.3.3. The linearity assumption and the relevant range ......................................................... 21 2.3.4. Mixed costs ....................................................................................................................... 21 2.4. The analysis of mixed costs .................................................................................................... 22 2.4.1. Diagnosing cost behaviour with a scattergraph plot ................................................... 23 2.4.2. The high-low method ....................................................................................................... 23 2.4.3. The least-squares regression method ............................................................................ 24 2.5. Traditional and contribution format income statement ..................................................... 24 2.6. Cost classifications for assigning costs to cost objects ...................................................... 25 2.7. Cost classifications for decision-making ............................................................................... 26 3. Job-order costing ............................................................................................................................ 27 3.1. Job-ordering costing – an overview .................................................................................. 27 3.2. Job-order costing – an example ......................................................................................... 27 3.2.1. Measuring direct materials cost ..................................................................................... 28 3.2.2. Job cost sheet ................................................................................................................... 28 3.2.3. Measuring direct labour cost .......................................................................................... 28 3.2.4. Computing predetermined overhead rates ................................................................... 28

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3.2.5. Choice of an allocation base for overhead cost ........................................................... 29 3.3. Job-order costing – the flow of costs................................................................................ 29 3.3.1. The purchase and issue of materials .............................................................................. 30 3.3.2. Issue of direct and indirect materials ............................................................................. 31 3.3.3. Labor cost .......................................................................................................................... 31 3.3.4. Manufacturing overhead costs ....................................................................................... 31 3.3.5. Applying manufacturing overhead ................................................................................. 32 3.3.6. Nonmanufacturing costs ................................................................................................. 32 3.3.7. Cost of goods manufactured .......................................................................................... 32 3.3.8. Cost of goods sold ............................................................................................................ 32 3.4. Schedules of goods of goods manufactured and cost of goods sold ................................ 32 3.5. Underapplied and overapplied overhead – a closer look................................................ 33 3.5.1. Computing underapplied and overapplied overhead .................................................. 33 3.5.2. Disposition of underapplied or overapplied overhead balances ................................ 33 3.5.3. Closed out to cost of goods sold .................................................................................... 34 3.5.4. Allocated between accounts ........................................................................................... 34 4. Process costing................................................................................................................................ 36 4.1. Comparison of job-order and process costing ..................................................................... 36 4.2. Cost flows in process costing ................................................................................................. 37 4.3. Equivalent units of production............................................................................................... 37 4.3.1. Weighted-average method ............................................................................................. 38 4.4. Compute and apply costs ....................................................................................................... 39 4.4.1. Cost per equivalent unit – weighted-average method ............................................ 40 4.4.2. Applying costs- weighted-average method .................................................................. 40 4.4.3. Operating costing ............................................................................................................. 41 5. Cost-volume-profit relationships .................................................................................................. 42 5.1. Basics of cost-volume-profit (CVP) analysis ........................................................................ 42 5.1.1. Contribution margin ......................................................................................................... 43 5.1.2. CVP relationships in equation form ............................................................................... 43 5.1.3. CVP relationships in graphic form .................................................................................. 43 5.2. Contribution margin ratio (CM ratio) .................................................................................... 45 5.2.1. Change in selling price ..................................................................................................... 46 5.3. Target profit analysis ............................................................................................................... 47 5.3.1. Target profit analysis ....................................................................................................... 47 5.3.2. The equation method....................................................................................................... 47

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5.3.3. The formula method ........................................................................................................ 47 5.3.4. Target profit analysis in terms of sales dollars.............................................................. 48 5.4. Break-even analysis ................................................................................................................. 48 5.4.1. Break-even in unit sales................................................................................................... 49 5.4.2. Break-even in sales dollars .............................................................................................. 49 5.4.3. The margin of safety ........................................................................................................ 49 5.5. CVP considerations in choosing a cost structure ................................................................ 50 5.5.1. Cost structure and profit stability .................................................................................. 50 5.5.2. Operating leverage ........................................................................................................... 50 5.5.3. Structuring sales commissions ........................................................................................ 51 5.5.4. The definition of sales mix .............................................................................................. 52 6. Variable costing and segment reporting: tools for management .............................................. 53 6.1. Overview of variable and absorption costing ...................................................................... 53 6.1.1. Variable costing ................................................................................................................ 53 6.1.2. Absorption costing ........................................................................................................... 53 6.1.3. Selling and administrative expenses .............................................................................. 53 6.1.4. Variable and absorption costing – an example ......................................................... 53 6.1.5. Variable costing contribution format income statement ............................................ 54 6.1.6. Absorption costing income statement ........................................................................... 54 6.1.7. Reconciliation of variable costing with absorption costing income ........................... 55 6.2. Advantages of variable costing and the contribution approach ........................................ 55 6.2.1. Enabling CVP analysis ...................................................................................................... 55 6.2.2. Explaining changes in net operating income ................................................................. 55 6.2.3. Supporting decision-making............................................................................................ 56 6.2.4. Adapting the theory of constraints ................................................................................ 56 6.3. Segmented income statement and the contribution approach ......................................... 56 6.3.1. Traceable and common fixed costs and the segment margin..................................... 56 6.3.2. Identifying traceable fixed costs..................................................................................... 56 6.4. Segmented income statements – common mistakes ...................................................... 56 6.4.1. Omission of costs ............................................................................................................. 56 6.4.2. Inappropriate methods for assigning traceable costs among segments ................... 57 6.4.3. Arbitrarily dividing common costs among segments ................................................... 57 7. Activity-based costing: a tool to aid decision-making ................................................................ 58 7.1. Activity-based costing: an overview ..................................................................................... 58 7.1.1. Nonmanufacturing costs and activity-based costing ................................................... 58

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7.1.2. Manufacturing costs and activity-based costing .......................................................... 58 7.1.3. Cost pools, allocation bases, and activity-based costing............................................. 58 7.2. Designing an activity-based costing (ABC) system ............................................................. 59 7.2.1. Steps for implementing activity-based costing: ........................................................... 59 7.2.2. Step 1: Define activities, activity cost pools, and activity measures ......................... 59 7.2.3. Step 2: assign overhead costs to activity cost pools ................................................... 60 7.2.4. Step 3: calculate activity rates ........................................................................................ 60 7.2.5. Step 4: assign overhead costs to cost objects .............................................................. 61 7.2.6. Step 5: prepare management reports ............................................................................ 61 7.3. Targeting process improvements .......................................................................................... 62 7.4. Activity-based costing and external reports ........................................................................ 63 8. Profit planning ................................................................................................................................. 64 8.1. The basic framework of budgeting........................................................................................ 64 8.1.1. Responsibility accounting ................................................................................................ 65 8.1.2. Choose a budget period .................................................................................................. 65 8.1.3. The self-imposed budget................................................................................................. 65 8.1.4. Human factors in budgeting............................................................................................ 66 8.1.5. The budget committee .................................................................................................... 66 8.2. The master budget: an overview ........................................................................................... 66 8.2.1. The sales budget ............................................................................................................... 67 8.2.2. The production budget OR the merchandise purchases budget ............................... 68 8.2.3. The direct materials budget ............................................................................................ 69 8.2.4. The direct labor budget ................................................................................................... 71 8.2.5. The manufacturing overhead budget ............................................................................ 72 8.2.6. The ending finished goods inventory budget ............................................................... 72 8.2.7. The selling and administrative expense budget............................................................ 73 8.2.8. The cash budget ............................................................................................................... 73 8.3. The budgeted income statement........................................................................................... 74 9. Flexible budgets and performance analysis ................................................................................. 76 9.1. Flexible budgets ....................................................................................................................... 76 9.2. Flexible budget variances ....................................................................................................... 77 9.2.1. Activity variances ............................................................................................................. 77 9.2.2. Revenue and spending variances ................................................................................... 78 9.3. Some common errors .............................................................................................................. 79 10. Standard costs and variances ...................................................................................................... 80

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10.1. Standard costs – setting the stage................................................................................... 80 10.1.1. Who uses standard costs? ............................................................................................ 81 10.1.2. Setting standard costs ................................................................................................... 82 10.1.3. Setting direct materials standards................................................................................ 82 10.1.4. Setting direct labor standards....................................................................................... 83 10.1.5. Setting variable manufacturing overhead standards ................................................. 83 10.2. A standard model for standard cost variance analysis ..................................................... 84 10.2.1. Using standard costs – direct materials variances ................................................. 85 10.2.2. The materials quantity variance ................................................................................... 85 10.2.3. The materials price variance ......................................................................................... 86 10.2.4. An important subtlety in the materials variances ...................................................... 87 10.3. Using standard costs – direct labor variances ................................................................ 88 10.3.1. Labor efficiency variance .............................................................................................. 89 10.3.2. Labor rate variance ........................................................................................................ 90 10.4. Using standard costs – variable manufacturing overhead variances .......................... 90 10.4.1. Manufacturing overhead variances ............................................................................. 91 10.5. Evaluation of controls based on standard costs ................................................................ 92 10.5.1. Advantages of standard costs ...................................................................................... 93 10.5.2. Potential problems with the use of standard costs ................................................... 93 11. Performance measurement in decentralized organizations .................................................... 94 11.1. Decentralization in organizations ........................................................................................ 94 11.1.1. Advanta...