ACC 230 Exam #1 Notes

What is Management Accounting?

This type of accounting measures, analyzes, and reports financial and nonfinancial information that helps managers make decisions for their organization

How does managers use management accounting information?

They use it to

• Develop, communicate, and implement strategies

• Coordinate product design, production, and marketing

  decisions and evaluate a company’s performance

What is Financial Accounting?

This type of accounting focuses on reporting finanacial information to external parties

What is Cost Accounting?

This type of accounting measures, anazlyes, and reports finanacial and nonfinancial information related to the cost of acquiring or using resources in an organization.

What does strategy specify in Management Accounting?

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace.

What are the two broad strategies in management accounting?

1. Cost leadership - cost, productivity, or efficiency advantage

2. Product differentiation - distinctive product/service, premium price

What does strategic cost management describe?

It describes the cost management that specifically focuses on strategic issues

What does value mean in managment accounting?

Value s the usefulness a customer gains from a company’s product or service. The entire customer experience determines the value a customer derives from a product.

What is Value Chain?

Value chain is the sequence of business functions by which a product is made progressively more useful to customers.

What does the value chain consist of?

It consist of:

• Research and Development

• Design of Products nd Processes

• Production

• Marketing (including Sales)

• Distribution

• Customer Service

What two parts of the value chain is associated with producing and delivering a product or service?

Production and Distribution

The two functions, Production and Distribution, together are known as what?

The Supply Chain

What does supply chain mean in managment accounting?

The supply chain describes the flow of goods, services, and information from the initial sources of materials, services, and information to their delivery, regardless of whether the activities occur in one organization or in multiple organizations.

Why do customers want companies to use the value and supply chain?

They want them to use it because it improves levels of performance in areas like:

• Cost and Efficiency

• Quality

• Time

• Innovation

• Sustainability

Why are companies find sustainability intentsifying?

They find it intentsifying because:

• Many investors care about sustainability.

• Companies are finding that sustainability goals attract and inspire employees.

• Customers prefer the products of companies with good sustainability records and boycott companies with poor sustainability records.

• Society and activist nongovernmental organizations monitor the sustainability performance of firms and take legal action against those that violate environmental laws.

What are the five steps for the decision-making process?

1. Identify the problem/uncertainties.

2. Obtain information.

3. Make predictions about the future.

4. Make decisions by choosing among alternatives.

5. Implement the decision, evaluate performance, and learn.

What are the four steps to planning?

1. Selecting an organization’s goals and strategies

2. Predicting results under various alternative ways of achieving those goals

3. Deciding how to attain the desired goals

4. Communicating the goals and how to achieve them to the entire organization.

Why do management accountants serve as business partners in planning activities?

It’s because they understand the key success factors and what creates value.

What are the three steps to control?

1. Taking actions that implement the planning decisions

2. Evaluating past performance

3. Providing feedback and learning to help future decision making

What is the most important planning tool when implementing strategy?

The most important tool is budget

What does budget mean?

Budget is the quantitative expression of a proposed plan of action by management and is an aid to coordinating what needs to be done to execute that plan.

What thrre guidlines help management accountants provide the most value to the strategic and operational decision-making of their companies?

1. cost-benefit approach

2. Behavioral and technical considerations

3. Different decisions for different cost

What does the cost-benefit approach mean?

The cost-benefit approach compares the benefits of an action/purchase to the costs. Generally, of course, the benefits should exceed the costs.

What does behavioral and technical considerations mean?

Behavioral and technical considerations recognize, among other things, that management is primarily a human activity that should focus on encouraging individuals to do their jobs better.

What does different decisions for different cost mean?

Managers use alternative ways to compare costs in different decision-making situations because there are different costs for different purposes.

What are the four standards of The Institute of Management Accountants (IMA) of ethical conduct?

1. Competence

2. Confidentiality

3. Integrity

4. Credibility

What does the Sarbanes-Oxley legislation focuses on?

It focuses on

• Internal controls

• Corporate governance

• Monitoring of managers

• Disclosure practices of public companies

What does cost mean?

Cost is a sacrificed or forgone resource to achieve a specific objective

What does actual cost mean?

Actual cost is a cost that has occurred already

What does budgeted cost mean?

Budgeted cost is a predicted cost

What does cost object mean?

Cost object is anything for which a cost measurement is desired

What does cost accumulation mean?

cost accumulation is the collection of cost data in an organized way by means of an accounting system

What does cost assignment mean?

Cost assignment is a general term that encompasses the gathering of accumulated costs to a cost object

What are the two ways the gathering of accumlated costs to a a cost object work?

1. Tracing costs with a direct relationship to the cost object

2. Allocating accumulated costs with an indirect relationship to a cost object

What are direct cost?

Direct costs can be conveniently and economically traced (tracked) to a cost object.

What are indirect cost?

Indirect costs cannot be conveniently or economically traced (tracked) to a cost object.

Examples of direct cost:

• Material (steel or tires for a car, as an example)

• Labor (assembly-line worker wages)

Examples of indirect cost:

• Electricity

• Rent

• Property taxes

• Plant administration expenses

What factors affect direct/indirect cost classification?

• The materiality of the cost in question

• The available information-gathering technology

• Design of operations

Note: specific cost may be both a direct cost of one cost object and an indirect cost of another cost object.

The direct/indirect classification depends on the cost object that one is trying to determine the cost of.

What does variable cost mean?

Variable costs change, in total, in proportion to changes in the related level of activity or volume of output produced.

What does fixed cost mean?

remain unchanged, in total, for a given time period, despite changes in the related level of activity or volume of output produced.

Variable cost are constant for what?

A per-unit basis

Fixed cost are inversely for what?

per unit change inversely with the level of production.

What does a cost driver mean?

A cost driver is a variable, such as the level of activity or volume, that causally affects costs over a given time span

What does a relevant range mean?

Relevant range means the band or range of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and the cost in question

Fixed costs are considered fixed only within the relevant range.

What can cost be classified as?

• Direct/Indirect

• Variable/Fixed

What are Manufacturing-sector companies?

Manufacturing-sector companies purchase materials and components and convert them into various finished goods.

What are Merchandising-sector companies?

Merchandising-sector companies purchase and then sell tangible products without changing their basic form.

What are Service-sector companies?

Service-sector companies provide services (intangible products) like legal advice or audits.

What are direct materials?

Direct materials are resources that are in-stock and available for use

Note: They are acquisition costs of all material that will become part of the cost object

What is an Work-in-process (or progress)?

They are goods that are partially worked on but not yet completed, often abbreviated as WIP

What are finished goods?

They are goods that are completed but not yet sold

Note: Merchandising-sector companies hold only one type of inventory: Merchandise Inventory

What are known as inventoriable costs?

1. Direct materials

2. Direct labor

3. Indirect manufacuring

What is direct labor?

Direct Labor is compensation of all manufacturing labor that can be traced to the cost object

What is indirect manufacturing?

Direct manufacturing is all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way

What are inventoriable costs?

Inventoriable costs are all costs of a product that are considered assets in a company’s balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold.

Finish the sentence: For manufacturing companies, all manufacturing costs are….

Inventoriable costs

Finish the sentence: For merchandising companies, only merchandise costs are….

Inventoriable costs

What are period cost?

Period cost are all costs in the income statement other than cost of goods sold. They are treated as expenses of the accounting period in which they are incurred.

Finish the sentence: For service companies, all costs are……

Period costs as they have no physical inventory

Finish the sentence: The Cost of Goods Manufactured and the Cost of Goods Sold section of the income statement are…..

Accounting representations of the actual flow of costs through a production system.

What is a prime cost?

A prime cost is referring to all direct manufacturing costs (materials and labor).

What is a conversion cost?

Conversion cost is a term referring to direct labor and indirect manufacturing costs.

What is considered part of indirect overhead cost?

Overtime premium labor costs

What is idle time referred to?

Idle time refers to the wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, poor scheduling, and the like.

What causes changes in cost and revenue?

Changes in production/sales volume

Total costs consist of what?

Fixed costs and variable costs

Sellig price, variable cost per unit, and fixed costs are all what?

Known and constant

What does breakeven point mean?

Breakeven point is that quantity of output sold at which total revenue equals total cost; that is, the quantity of output sold results in $0.00 of operating income or where OI = $0

What is margin of safety (MOS)?

Margin of safety measures the distance between budgeted sales and breakeven (BE) sales

What is margin of safety equation?

MOS = Budgeted Sales - BE Sales

What is margin of safety ratio equation?

MOS Ratio = MOS / Budgeted Sales

What is operating leverage?

Operating leverage describes the effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin.

Organizations with a high proportion of fixed costs in their cost structures have high what?

Operating leverage

What does sales mix mean?

Sales mix is the quantity or proportion of various products or services that constitute a company’s total unit sales

What is the gross margin equation?

Gross Margin = Revenue - COGS

What does gross margin mean?

Gross margin measures how much a company charges for its products over and above the cost of acquiring or producing them.

What does contribution margin mean?

Contribution Margin indicates how much of a company’s revenue is available to cover fixed costs.

What does cost pool mean?

Cost Pool is a grouping of individual indirect cost items. Cost pools simplify the allocation of indirect costs because the costing system does not have to allocate each cost individually.

What does cost allocation mean?

Cost-allocation base is a systematic way to link an indirect cost or group of indirect costs to cost objects.

What happens in a job costing system?

In a Job Costing System, the cost object is a unit or multiple units of a distinct product or service which we call a job. Each job generally uses different amounts of resources.

What happens in a process costing system?

In a Process Costing System, the cost object includes masses of identical or similar units of a product or service. In this type of system, we divide the total cost of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost.

What does actual costing mean?

Actual Costing allocates indirect costs based on the actual indirect cost rates times the actual quantities of the cost allocation base.

What does normal costing mean?

Normal Costing allocates indirect costs based on the budgeted indirect cost rates times the actual quantities of the cost allocation base.