Managerial Accounting Exam 1

financial accounting

guided by rules, not flexible, historical, looks at company as a whole

managerial accounting

no rules, flexible, forward-looking, segmented information

cost

use of company resources

expense

"used up" cost

professional ethics

competence, confidentiality, integrity, credibility

fixed costs

costs that remain the same in total, but change on a per unit bases, with changes in production volume

variable costs

costs that remain the same on a per unit basis, but change in total, with changes in production volume

semi-variable (mixed) costs

costs which have a fixed and variable component

relevant range

the normal range of units of production where the fixed and variable relationship holds.

regression analysis

a statistical method used to estimate fixed and variable components of a mixed cost

cost equation

Total Costs = Fixed Costs + [ Variable Costs per unit x # of units]

cost structure

proportion of variable and fixed costs in the organization

High Low Method and steps to perform it

another method used to estimate fixed and variable components of a mixed cost


Step 1 - estimate variable cost per unit – change in cost / change in volume

Step 2 – estimate fixed cost – use cost equation

Contribution Margin Income Statement format

Sales – Variable Expenses = CM – Fixed Expenses = Profit
Sales = units x sales price


Variable expenses = units x variable cost per unit, Fixed expenses = total fixed expenses

Cost Flows and All Calculations involved

Cost Flows
Raw Materials Used:

Beg RM + RM purchased = Available – Ending RM = RM Used
Cost of Goods Manufactured (COGM):
Beg WIP + RM Used + Direct Labor + Man. OH = Available – Ending WIP = COGM
Cost of Goods Sold (COGS):

Beg FG + COGM = Available – Ending FG = COGS
Sales – COGS = Gross Profit – Period Costs = Net Income

quality costs

prevention, appraisal, internal failure, external failure

marginal costs

cost to produce one more unit

product cost/unit=

total product cost/units produced

opportunity cost

foregone benefits to choose one option vs. another

sunk cost

irrelevant to decision making, a cost that has already been incurred

3 types of manufacturing costs

1. direct materials

2. direct labor

3. direct overhead

direct materials

material costs that can be directly traced to the production of a good

direct labor

labor traced directly and conveniently to the production of a product

Manufacturing Overhead

includes
-indirect labor
-indirect materials
-depreciation
-insurance
-utilities
-etc. related to factory production

manufacturing cost

all cost related to making a product

non-manufacturing cost

all other costs, expensed as incurred

examples of manufacturing vs. non-manufacturing costs

depreciation of factory equipment- manufacturing cost

depreciation of a salesman's car- non-manufacturing cost

job-order costing

cost assigned to each job or product

process cost

cost assigned to the processes involved in making product (used for homogeneous products such as detergent, paint, beverages, etc.

cost pools

grouping of similar overhead costs

cost driver

activities that cause the overhead to occur (e.g. – more use of a machine increases utility cost (an overhead cost), thus machine hours could be considered a cost driver)

pre-determined overhead rate

Estimated Total Manufacturing OH / Estimated Total Cost Driver Amount

applied overhead

Pre-determined Rate x Actual Use of Cost Driver

overapplied overhead

the amount of overhead applied to the job costs is greater than actual overhead costs. When this occurs, reduce cost of goods sold.

underapplied cost of goods sold

the amount of overhead applied to the job costs is less than actual overhead costs. When this occurs, increase cost of goods sold

controller

in charge of accounting functions, usually reports to the CFO

line position

directly involved in achieving the organization's goal

staff position

provides assistance to the line positions, indirectly in achieving the organization's goals

step variable costs

a cost that increases or decreases in intervals

committed fixed cost

long term in nature, can not be reduced over a short-period of time (ex – costs associated with owning a building)

discretionary fixed costs

short-term in nature, can be reduced over a short-time frame (year or less)

cost estimate methods for semi variable costs and descriptions of each method

1. graphing method-short-term in nature, can be reduced over a short-time frame (year or less)

2. high-low method- use high and low points to get a rough estimate

3. regression analysis- using statistical methods to consider all points

the cost equation

Y=A+Bx

Y=total costs
A=total fixed costs
B= variable cost per unit
x= level of activity

steps in the high-low method

1)Pick the data points with the highest and lowest activity levels

2. Estimate the variable cost per unit by looking at “change in cost / change in volume”.

3. For either high or low data points, “plug” variable cost per unit and volume in cost equation and solve for fixed cost

accounting information for internal users vs. external users

External Users:

-Guided by rules (GAAP, tax code, etc.)
-Generally not flexible
-Historical Information
-Emphasis on organization as a whole

Internal Users:
-No rules, geared to specific company
-flexible and timely
-Forward-looking, concerned with future
- Emphasis on business segments

role of managerial accountant

• assist management in the decision making process

• analyze and interpret information

management activities

-planning
-controlling
-decision making
-directing and motivating

planning activities

• short term planning for less than one year

• long term planning for more than one year -often uses pro forma financial documents and budgets

• develops the company's goals and objectives

T/F: It is okay to make decisions based solely on quantitative data in managerial accounting

False. Both Quantitative and qualitative information should be considered when making decisions

just-in-time manufacturing

-Product made “just-in-time” to meet customer demand

-Carry little or no inventory of materials or finished goods

-Production generally completed in one area or “manufacturing cell”

-Reduce non-value added activities and costs – costs that do not provide more value for the customer

Just-in-time inventory and production management system

-Materials purchased and goods made only as needed (small orders)

–reliable suppliers

-Uniform production rate –

-less delays and fluctuations

-High quality – limits defective units

-Quick setups of machinery –

-manufacturing cells

-Multi-skilled workers – reduce bottlenecks, more flexible

-Reduced non-value added costs such as storage, wait time and moving time

professional ethics in accounting

integrity, credibility, competence, confidentiality

product cost vs. period cost

product cost- costs related to goods either purchased for resale or manufactured for resale, also known as inventory costs

period costs- any cost not a product cost (ex. advertising, selling, and administrative costs)

manufacturing vs. merchandising companies

manufacturing- make what you sell

merchandising- buy what you sell

cost flow for a traditional manufacturer

1. Raw materials (store room)

2. Work in Progress (factory)

3. Finished Goods (warehouse)

4. Cost of Goods Sold (Customer)

Costs of Quality

1. Prevention Costs (Preventing design flaws)

2. Appraisal Costs (testing costs, inspection costs)

3. Internal Failure Costs (product failure before reaching customer, reworking product cost)

4. External Failure costs (customer failure, warranties, product recall, legal fees)

job-order costing

1. assigns jobs for each individual product

2. works well with products that are different or are in low volume

3. used in service industries

process costing

1. assigns costs to production processes

2. works well for homogeneous products produced on a continuous basis

3. unit costs calculated using average cost approach

job order costing involves...

(1) Measure and Track Direct Material
(2) Measure and Track Direct Labor
(3) Apply Manufacturing Overhead

(Note: Companies often use a form called a job cost sheet to record the 3 costs above)

measure and track direct materials

-Determine amount of material used for specific product and apply cost

-Service Companies usually have little direct materials

-Material Requisition Form can be used as source document for cost accounting entry

measure and track direct labor

-Measure amount of hours used and apply labor rate

-Must include fringe benefits, usually run 30% to 35% of wage rate.

-Time Record can be used as source document for cost accounting entry

Tracking manufacturing overhead

-Most difficult of costs to assign to a particular product or job.

-Most overhead is an indirect cost so unable to track to individual product or job.

-Therefore, overhead must be applied (allocated)

cost driver

An activity or factor that causes overhead costs to be incurred

plantwide overhead

use only one overhead rate for the entire company

departmental overhead

each department within the factory has an overhead rate. Overhead is allocated to job by department.

JIT production comes from what model?

The Lean Model

Theory of constraints

based on insight that effectively managing a constraint is key to sucess

constraint

anything that keeps you from getting what you want

Six sigma

improvement method that relies on customer feedback and fact based data gathering and analysis techniques to drive process improvement

non value added activities

activities that doe not add value to the product or service that customers do not want to pay for

Sarbanes-Oxley Act of 2002

intended to protect the interests of those who invest publicly traded companies by improving on the reliability and accuracy of financial reports and disclosures. This includes:

1. requires CEO and CFO to certify in writing that their company's financial statements and accompanying disclosures represent the results of operations fairly

2. established the Public Company Accounting Oversight Board to provide additional oversight to the audit profession

3. Places power to hire, compensate and terminate the public accounting firm that audits a company's financial reports in the hands of the audit committee of the board of directors

4. Places restrictions on audit firms

5. Requires a company's annual report contain an internal control report

6. Establishes severe penalties as many as 20 years in prison for altering or destroying any documents that may eventually be used in an official proceeding and up to ten years for managers who retaliate against whistle blowers who report outside of the company's chain of command

enterprise risk management

identify risks and manage them effectively

value/non-value

engineer designs product improvement

value added

value/non-value

storage of a completed product

non value added

value/non-value

assembling the product

value added

value/non-value

delivery of product to customer

value added

value/non-value

idle time of employees between work processes

value added

Product Cost or Period Cost ?

depreciation of factory equipment

product

manufacturing overhead

Product Cost or Period Cost ?

depreciation of cars used by sales people

period

Product Cost or Period Cost ?

lubricants used on factory equipment for maintenance

product

manufacturing overhead (indirect materials)

Product Cost or Period Cost ?

factory supervisors' salaries

product

manufacturing overhead

Product Cost or Period Cost ?

heat, water, and electricity used in the power plant

product cost

manufacturing overhead

Product Cost or Period Cost ?

material used to produce product

product cost

direct materials

Product Cost or Period Cost ?

fringe benefits paid to hire assembly worksers

product

direct labor

Fixed or Variable Cost ?

building (assume 40 year life)

fixed

Fixed or Variable Cost ?

raw material costs to output product

variable

Fixed or Variable Cost ?

factory supervisor's salary

fixed

Fixed or Variable Cost ?

hourly wages paid to assembly line workers

variable

Fixed or Variable Cost ?

property taxes paid on a building

fixed