Managerial Accounting: Costs, Reports, and Operations

Managerial accounting vs Financial Accounting -Primary users of reports

FA- External users

MA - Internal users

Managerial accounting vs Financial Accounting- Types and Frequency of Reports

FA- External financial statements

MA - Internal reports

Managerial accounting vs Financial Accounting- Purpose of Reports

FA- General-purpose. MA- Special-purpose for specific decisions.

Managerial accounting vs Financial Accounting- Content of Reports

FA- condensed

MA- Very detailed.

Managerial accounting vs Financial Accounting- Verification Process

FA- Audited by C PA. MA- No independent audits.

Management Functions - Planning

Maximize short-term profit environmental protection and social

programs. Add value to the business

Management Functions - Directing

Implement planned objectives rewards to motivate employees

Hire and train employees make smooth-running operation

Management Functions - Controlling

keep activities on track

Determine if goals are met

Decide changes stay on track

informal or formal system of evaluations

-Managerial accountants have a single role within an organization: collecting and reporting costs to management

-Financial accounting reports are general-

purpose and intended for external users

-managerial accounting reports are special-

purpose and issued as frequently as needed.

-Managers' activities and responsibilities can

be classified into three broad functions: cost

accounting, budgeting, and internal control.

-Managerial accounting reports must now

comply with generally accepted accounting

principles (GAAP).

False

True

True

False

False

Manufacturing Costs

Activities and processes that convert raw materials into

finished goods

Direct Materials, Direct Labor, Manufacturing Overhead

Manufacturing Costs

Direct Materials

Raw materials are the basic materials and parts used in the manufacturing process and can be physically and directly associated with finished product during the manufacturing process

Manufacturing Costs Indirect Materials

Have one of two characteristics:

1. Not physically part of finished product

2. Are impractical to trace to finished product because

their physical association with finished product is too

small in terms of cost

Considered part of manufacturing overhead

Direct Labor and Indirect Labor

Direct Labor- Work of factory employees that can be

physically and directly associated with

converting raw materials into finished goods.

Indirect Labor - Work of manufacturing-related employees that has no physical association with the making of the finished product or costs for which it is impractical to trace to the goods produced.

Manufacturing Overhead

Costs indirectly associated with manufacture of the

finished product

-All manufacturing-related costs except direct materials

and direct labor

Also called factory overhead, indirect manufacturing costs

Product Costs

All manufacturing cost components:

o Direct materials

o Direct labor

o Manufacturing overhead (indirect materials, indirect labor, etc indirect costs)

Costs that are an integral part of producing product

Not an expense (COGS) until goods are sold

Period Costs

Nonmanufacturing costs

Includes all selling and administrative expenses

Charged to expense as incurred

(selling expenses, administrative expenses)

Suppose you started your own snowboard factory,

Terrain Park Boards. Here are some of the costs that your

snowboard factory would incur. Assign the following costs

Wood cores, fiberglass, and resin =

Labor to trim and shape boards=

Factory equipment depreciation=

Property taxes on factory building=

Advertising costs=

Sales commissions=

Factory maintenance salaries=

Salary of factory manager=

Cost of shipping boards to customers =

Salary of product quality inspector=

Direct materials

Direct labor

Manufacturing overhead

Manufacturing overhead

Period Cost

Period Cost

Manufacturing overhead

Manufacturing overhead

Period Cost

Manufacturing overhead

A bicycle company has these costs: tires, wages of employees who put tires on the wheels, factory building depreciation, advertising expenditures, factory machine lubricants, spokes, salary of factory manager, salary of accountant, handlebars, salaries of factory maintenance employees, and salary of product quality inspector. Classify each of these costs as a product cost or a period cost. Specify direct materials, direct labor, or manufacturing overhead for product costs

Tires = Direct materials

Wages of employees who put tires on the wheels = Direct labor

Factory building depreciation = Manufacturing overhead

Advertising expenditures =Period Cost

Factory machine lubricants = Manufacturing overhead

Spokes = Direct materials

Salary of factory manager = Manufacturing overhead

Salary of accountant = Period Cost

Handlebars = Direct materials

Salaries of factory maintenance employees = Manufacturing overhead

Salary of product quality inspector = Manufacturing overhead

merchandiser and a manufacturer differ in the cost of

goods sold section.

Formulas

Manufacturer = Beginning inventory + cost of goods purchased - Ending inventory = COGS

Merchandiser = Beginning Finished goods inventory + Cost of goods manufactured - Ending finished goods inventory= COGS

Total Manufacturing Costs-

Total Work in Process-

Total Manufacturing Costs - sum of direct material costs, direct labor costs, and manufacturing overhead incurred in the current year.

Total Work in Process - (1) cost of beginning work in process and (2) total manufacturing costs for the current period.

Cost of Goods Manufactured formula

beginning work in process inventory + total manufacturing costs = Total cost of work in process

Total cost of work in process - ending work in process inventory = Cost of goods manufactured

Refers to all business processes associated with providing a product or performing a service

For a manufacturing firm, these include the following

Just-In-Time (JIT) Inventory Method

System in which goods are manufactured or purchased just in time for sale

Total Quality Management (TQM)

System implement to reduce defects in finished products, with goal of zero defects

Theory of Constraints

Constraints ("bottlenecks") within the value chain that

limit company's potential profitability

Enterprise Resource Planning (ERP)

Software programs designed to manage all major business processes

Activity-Based Costing

Allocates overhead based on each product's use of

activities (more accurate product costing)

Sarbanes-Oxley Act

Clarifies management's responsibilities

Requires certifications by CEO and CFO

Match the descriptions to terms

a. Activity-based costing

b. Balanced scorecard

c. Corporate social responsibility

d. Just-in-time (JIT) inventory

e. Total quality management (TQM)

f. Statement of Ethical Professional Practice

g. Value chain

1. All activities associated with providing a product

or performing service.

2. A method of allocating overhead based on each

product's use of activities in making the product.

3. Systems implemented to reduce defects in finished

products with the goal of achieving zero defects.

4. A performance-measurement approach that uses

both financial and nonfinancial measures, tied to

company objectives, to evaluate a company's

operations in an integrated fashion.

G

A

E

B

Match the descriptions to terms

a. Activity-based costing

b. Balanced scorecard

c. Corporate social responsibility

d. Just-in-time (JIT) inventory

e. Total quality management (TQM)

f. Statement of Ethical Professional Practice

g. Value chain

5. Inventory system in which goods are manufactured

or purchased just as they are needed for use or sale.

6. A company's efforts to employ sustainable

business practices with regards to its employees,

society, and the environment.

7. A code of ethical standards developed by the

Institute of Management Accountants.

D

C

F

Cost Behavior Analysis def.

is the study of how specific costs respond to changes in the level of business activity.

activity levels include - sales dollars, miles driven, room occupancy.

Activity index:

Allows costs to be classified as variable, fixed, or mixed. identifies activity that causes change in behavior of cost

Variable Costs

Costs that vary in total with changes in the activity level.

Example: If the activity level increases by 10 percent, total variable costs increase by 10 percent

Remain the same per unit at every activity level.

Damon Company manufactures cell phones that contain a $10 camera. The activity index is the number of cell phones produced.the total cost of the cameras used increases by $10 with each manufactured phone. graph. shows, total cost of the cameras will be $20,000 if Damon produces 2,000 cell phones, and $100,000 when it produces 10,000 cell phones. unit variable costs remains the same as the level of activity changes. 2nd graph shows, the unit cost of $10 for the camera is the same whether Damon produces 2,000 or 10,000 cell phones

Fixed Costs

Costs that remain the same in total regardless of

changes in the activity level

Unit fixed costs varies inversely with activity: As ____

volume increases, unit cost declines, and vice versa

ex. rent, insurance

Company leases its productive facilities at a rent cost of $10,000 per month. Total fixed costs of the facilities will remain constant at every level of activity, as graph A shows. (Illustration of total fixed costs). But, on a per unit basis, the cost of rent will decline as activity increases, as graph B shows. At 2,000 units, the unit cost per cell phone is $5 ($10,000 ÷ 2,000). When Damon produces 10,000 cell phones, the unit cost of the rent is only $1 per cell phone ($10,000 ÷ 10,000).

Relevant Range

- Range of activity over which a company expects to

operate during a year. Relationship between variable costs and changes in activity level is often curvilinear. no straight-line relationship variable costs or fixed costs. fixed costs= nonlinear

Mixed Costs

Costs that have both a variable cost and a fixed component.

Change in total but not proportionately with changes in activity level

Classify each cost as variable, fixed, or mixed

direct materials

maintenance

direct labor

indirect materials

depreciation

utilities

rent

Variable= direct materials, direct labor, indirect materials

fixed= depreciation, rent

mixed= maintenance, utilities

High-low method

uses the total costs incurred at the high and the low levels of activity to classify mixed costs into fixed and variable components.

Equation for unit variable costs

Change in total cost as high versus low activity level / high minus low activity level = unit variable costs

High-Low Method

Computation of fixed costs

High-Low Method

Total costs for 45,000 miles Maintenance costs are therefore $8,000 per month of fixed costs plus $1.10 per mile of variable costs. This is represented by the following equation

Example: At 45,000 miles, estimated maintenance costs would be

(FC) 8,000 * (VC) (1.10 * miles driven) = total maintenance costs

8,000* (1.10*45,000) =57,500

(14,740) highest activ. lev. , lowest activ. lev. (11,100)

Variable cost= (14,740 - 11,100) / (9,800 - 7,000) = $1.30 per unit

Fixed cost= (14,740 - 12,740(1.30×9800)) = $2000 OR $11,100 − 9,100(1.30 × 7,000) = $2,000

Part b- Cost = $2,000 + ($1.30 × (8,000) units produced) which is Total cost is $8,000 2,000+10,400= 12,400

Cost-volume-profit

analysis is the study of the effects of changes in costs and volume (quantity) on a company's profits.

Classifies costs as fixed or variable.

Cost-Volume-Profit Analysis

Basic Components

Contribution margin and contribution margin ratio

amount of revenue remaining after deducting variable costs.

May be expressed as unit contribution margin.

Unit selling price - unit variable costs = unit contribution margin

unit contribution margin / unit selling price = contribution margin ratio

When the break-even-point in sales units is desired,

unit contribution margin is used

fixed costs / unit contribution margin =break even point in sales units

When the break-even-point in sales dollars is desired,

contribution margin ratio is

fixed costs / contribution margin ratio=break even point in sales dollars

Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25%. If Gossen will

break even at this level of sales, what are the fixed costs?

$200,000

Lombardi Company has a unit selling price of $400, unit variable costs of $240, and fixed costs of $180,000. Compute the break-even point in sales units using (a) a mathematical equation and (b) unit contribution margin

sales - variable costs - fixed costs = net income

400Q - 240Q - 180,000 = 0

160Q - 180,000

Q=1,125 units

fixed costs / unit contribution margin = break even point in sales units

180,000 / 160 = 1,125 units

Target Net Income

Level of sales necessary to achieve a target income.

Can be determined from each of the approaches used to

determine break-even sales/units

sales - variable costs - fixed costs = target net income

Equation for sales in units and Equation for sales in dollars

(fixed costs + target net income) / unit contribution margin = sales units

(fixed costs + target net income) / contribution margin ratio = sales dollars

The mathematical equation for computing required sales to

obtain target net income is:

Variable costs + Fixed costs + Target net income.

Equation for margin of safety in dollars

actual (or expected) sales - break even sales = margin of safety in dollars

Equation for margin of safety ratio

margin of safety in dollars / actual (or expected) sales= margin of safety ratio

The higher the dollars or percentage, the greater the

margin of safety.

Marshall Company had actual sales of $600,000 when break even sales were $420,000. What is the margin of safety ratio?

(600,000 - 420,000) = 180,000

180,000 / 600,000 = 30%

30%

Zootsuit Inc. makes travel bags that sell for $56 each. For the coming year, management expects fixed costs to total

$320,000 and unit variable costs to be $42. Compute the

following:

a) break-even point in sales dollars using the contribution

margin (CM) ratio;

b) the margin of safety and margin of safety ratio assuming

actual sales are $1,382,400

c) the sales dollars required to earn net income of $410,000.

a) Contribution margin ratio = [($56 − $42) ÷ $56] = 25%

Break-even sales in dollars = $320,000 ÷ 25% = $1,280,000

b) Margin of safety = $1,382,400 − $1,280,000 = $102,400

Margin of safety ratio = $102,400 ÷ $1,382,400 = 7.4%

c) Required sales in dollars = ($320,000 + $410,000) ÷ 25% = $2,920,000

The high and low activities are 65,000 miles in December

and 15,000 miles in July.

• The maintenance costs at these two levels are $63,000 and

$39,000, respectively

Total variable cost = number of miles × cost per mile. At the low activity level of 15,000 miles, total variable cost is $7,200

(15,000 × $0.48).

To determine fixed costs, subtract total variable costs at the low activity level from the total cost at the low activity level.

Fixed costs = $39,000 − ($0.48 × 15,000) = $31,800

the cost equation based on the high-low method

for this data produces the following calculation:

maintenance costs = intercept (31,800) + slope x quantity (0.48 x miles driven)

Regression analysis

is a statistical approach that estimates the cost equation by employing information from all data points, not just the highest and lowest ones. fixed cost variable costs

total maintenece costs = intecept + slope x quantity

18,502 + (0.81 x miles driven)