Acc 202 managerial accounting

Differences between financial and managerial accounting

Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. ( reports to those outside the organization, emphasizes financial consequences of past activities and emphasizes objectivity and verifiability also emphasizes precision as well as emphasizes company-wide reports, also it follow GAAP is mandatory for external reports)

Managerial accounting is concerned with providing information to managers for use within the organization (reports yo managers inside the organization for planning, controlling and decision making. It emphasizes decisions affecting the future, also emphasizes relevance and timeliness. Emphasizes segment reports, does not have to follow GAAP and is not mandatory.

Three vital activities performed by managers, using managerial accounting.

Three vital activities performed by mangers are

1. Planning- which involves establishing goals and specifying how to achieve them.

2. Controlling - which involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

3. Decision making - which involves selectjng a course of action fr competing alternatives.

Lean production vs. Traditional manufacturing, and related advantages

Lean production is a management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customers orders.

Lean thinking differs from traditional manufacturing methods, which organize work departmentally and encourage departments to maximize their output even if it exceeds customer demand and bloats inventories.

The lean approach also results in fewer defects, less wasted effort, and quicker customer response times than traditional production methods.

Manufacturing cost classifications: direct materials, direct labor and manufacturing overhead.

Direct materials - materials that become an integral part of a finished product and whose costs can be conveniently traced to it

Direct labor - factory labor cost that can be easily traced to individual units of product. Also called touch labor.

Manufacturing overhead - all manufacturing costs except direct materials and direct labor.

Components of manufacturing overhead

Components includes items such as indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities.

Non- manufacturing cost: selling and administrative costs

Selling cost - includes all costs that are incurred to secure customer orders and get the finished product to the customer

Ex. Of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. Selling costs can either be indirect or direct costs.

Administrative costs - includes all costs associated with the general management of an organization rather than manufacturing or selling.

Ex. Of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. Administrative costs can be either direct or indirect costs.

Product vs. Period Cost

Product Cost - include all cost involved in acquiring or making a product. (In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Product costs attach to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. Product costs are initially assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released form inventory as expenses ( typically called COGS) and matched against sales revenue on the income statement.

Period Costs - are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. Period costs are not included as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting Ex: sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period cost.

Variable costs vs. Fixed costs vs. Mixed costs

Variable cost -varies, in total, in direct proportion to changes in the level of activity. Common examples of variable costs include cost of goods for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs.

For a cost to e variable, it must be variable with respect to something. (Activity Base)- which is the measure of whatever causes the incurrence of a variable cost. An activity base is sometimes referred to as a cost driver.

Fixed Costs -is a cost that remains constant, in total, regardless of changes in the level of activity. Ex. include straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising. Unlike variable costs, fixed costs are not affected by changes in activity.

Mixed Costs - contains both variable and fixed cost elements. Mixed coasts are also known as semivariable costs.

( mixed cost behavior)

Y=a+bX

Y = The total mixed cost

a = The total fixed cost (the vertical intercept of the line)

b = THe variable cost per unit of activity ( the slope of the line)

X = The level of activity

Variable and Fixed cost behavior: total costs and cost per unit

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The High - Low Method

Variable Cost is based on the rise-over-run formula for the slope of a straight line

(Variable cost = slope of the line = Rise/Run = y2 - y1/x2 - x1

Variable cost = Cost at the high activity level - Cost at the low activity cost / High activity level - low activity level

Fix cost element = total cost - variable cost element

Contribution income statement vs traditional income statement

Contribution income statement

Sales

Variable expenses:

Cost of goods sold

Variable selling expense

Variable administrative expense

Contribution margin

Fixed expenses:

Fixed selling expense

Fixed administrative expense

Net operating income

Traditional income statement

Sales

Cost of goods sold

Gross margin

Selling and Administrative expenses:

Selling expenses

Administrative expenses

Net operating income

Differential vs. Opportunity vs. Sunk costs

Differential costs

-is the difference in costs between any two alternatives.

Opportunity costs

-Is the potential benefit that is given up when one alternative is selected over another.

Sunk Costs

-is a costs that has already been incurred and that cannot be changed by any decision made now or in the future.

(Should be ignored when making decisions

Predetermined Overhead Rate

is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base as follows

POHR = estimated total manufacturing overhead cost / Estimated total amount of the allocation base

Formula for determining the amount of overhead cost to apply to a job

Y = a + bX

Y = The estimated total manufacturing overhead cost

a = The estimated total fixed manufacturing overhead cost

b = The estimated variable manufacturing overhead cost per unit of allocation base

X = The estimated total amount of the allocation base

Applying Manufacturing Overhead

Overhead applied to a particular job = POHR x Amount of allocation base by the job

Overhead applied to a particular job = POHR x Actual direct labor-hours charged to the job

step 1. Estimate the direct-labor hours would be required to support production for the year = X

Step 2: Estimate the total fixed manufacturing overhead cost for the coming year = a

Step 3: Us the cost formula shown to estimate its total manufacturing overhead cost for the year = Y

(Y = a + bX)

Step 4: Us the POHR = Est total MOH cost / Est total AB

Then, Overhead applied = POHR x Actual DLH

Compute total cost and average cost per unit of a job

To compute the total product cost of a job. You have to add all of the direct materials costs applied to the job. Then add all of the direct labor costs applied to the job. Then calculate the total manufacturing overhead by using the cost formula (Y = a + bX). then finding the ( POHR by dividing the Est. Total MOH cost / Ext. AB ). Once you calculate the POHR,( multiply the POHR x Actual AB) to get the total MOH applied to the job. Lastly, add ( DM + DL + MOH) to get the Total product cost.

To calculate the average cost per unit ( divide the total product cost by the number of units produced for that job)

Raw Materials vs. Work in process vs. Finished Goods vs. Cost of Goods Sold

Raw Materials

-include any materials that go into the final product. When raw materials are used in production, their costs are transferred to the Work in Process inventory accounts as DIRECT MATERIALS

Work in Process

- consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Direct labor cots are added directly to Work in Process - they do not flow through Raw Materials inventory. Manufacturing Overhead costs are applied to Work in Process by multiplying the POHR by the Actual quantity of the allocation base consumed by each job. When goods are completed, their costs are transferred from Work in Process to Finished Goods.

Finished Goods

- consists of completed units of product that have no yet been sold to customer. The amount transferred from Work In Process to Finished Goods that were finished is referred to as the COST OF GOODS MANUFACTURED

Costs OF Goods Sold

- As finished goods are shipped to customers, their accumulated costs are transferred from the Finished Goods account to the Cost of Goods Sold account.

Flow of costs in job-order costing system, from Raw materials through Cost of Goods Sold

Calculating the Raw Materials used in Production or Direct materials:

Beginning Raw Materials inventory

+ Raw Materials Purchased

= Total Raw Materials available for use in production

- Ending Raw Materials inventory

= Raw Materials used in production (Direct Materials)

As items are removed from raw materials inventory and placed in the production process, they are called Direct Materials. Before being placed in to Work in Process inventory, MOH costs must be applied.

Calculating Manufacturing Cost:

Direct materials ( Raw materials used in production)

+Direct labor

+Manufacturing overhead applied

= Total Manufacturing Costs

All Manufacturing cost are added to production during the period to the beginning balance of Work in Process

Calculating the Cost of Goods Manufactured, which is the result from Work in Process inventory:

Beginning Work in Process Inventory

+ Total Manufacturing Costs

= Total Work in Process for the period

- Ending Work in Process inventory

=Cost of Goods Manufactured

Costs associated with the goods that are completed during the period are transferred to finished goods inventory

Calculating the COGS from Finished Goods Inventory:

Beginning Finished Goods inventory

+ Cost of Goods Manufactured

= Cost of Goods available for sale

- Ending Finished Goods Inventory

= Cost of Goods Sold

Define and compute underapplied / overapplied overhead and prepared related journal entries to close out MOH at end of period to appropriate accounts, either COGS or allocated between inventory accounts

use T-accounts to see : Debit- Actual and Credit- Applied

Underapplied overhead

- exists when the amount of overhead applied to jobs during the period using he predetermined overhead rate is less than the total amount of overhead actually incurred during the period

Overapplied overhead

- exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

Similarities / Difference between process costing and job - order costing and when each is appropriate

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