BA 115 Midterms 1

COVERAGE: Manufacturing Income Statement; Cost-Volume-Profit: Breakeven Point, Modified Breakeven Point, High-Low Method, Sales Mix; Absorption Costing & Variable Costing, Job Order Costing, ABC Costing

Managerial Accounting

main point is delivering useful information for decision making within the organization

Distinct Features of Financial Accounting

• for external users

• general purpose

• audited by CPA

Distinct Features of Managerial Accounting

• for internal users

• frequent internal reports for specific decisions

• no independent audits

Planning

managerial function to establish value-adding objectives

Decision Making or Directing

managerial function to make intelligent, data-driven decisions

Controlling

managerial function of keeping activities on track

Cost Behavior Analysis

how specific costs respond to changes in business activity

Relevant Range

the range where the cost equation and assumptions are valid

the range which a company expects to operate

Mixed Cost

costs that contain both variable and fixed elements

Variable Cost

varies in total according to volume

constant per unit

Fixed Cost

constant regardless of activity

varies per unit according to volume

Direct Materials

Variable Cost

raw materials used for an integral part of the finished product

Indirect Materials

Variable Cost counted as Manufacturing Overhead

do not become part of the finished product or is too small to count

Direct Labor

Variable Cost

work that can be directly associated with making finished goods

Indirect Labor

Variable Cost counted as Manufacturing Overhead

work with no physical association to finished good

Manufacturing Overhead

All other costs except Direct Materials and Direct labor

Mixed Cost: Indirect Labor, Maintenance, Utilities (Fixed); Indirect Materials (Variable)

Product Cost

Inventoriable Cost

Manufacturing Cost

costs integral to producing finished goods

Period Cost

non-manufacturing related costs like sales and administrative expenses

deducted in period which they are incurred

Sunk Cost

cost that has already been incurred and cannot be changed

Opportunity Cost

cost of unpicked alternative

Balance Sheet

contains inventories: raw materials, WIP, finished goods

Income Statement

contains COGS and SAE

Cost of Goods Sold

COGS

(Beg. FG Inventory + COGM) - End FG Inventory

Cost of Goods Manufactured

COGM

(Beg. WIP Inventory + Total Manufacturing Costs) - End WIP inventory

High-Low Method

used to ASSIST in classifying mixed costs to their fixed and variable components

H-L cost / H-L activity = Variable cost per unit

activity governs when costs don’t match activity (activity drives cost)

Total Cost Equation

Total Cost = (Variable Cost/ unit * Units) + Fixed Cost

Cost-Volume-Profit Analysis

CVP Analysis

studies effects of changes in Cost and Volume to Profits

CVP Assumptions

1. constant selling price

2. cost and revenue is linear throughout relevant range

3. sales mix is constant

CVP Income Statement

classifies costs as variable or fixed and computes a contribution margin

Contribution Margin

remaining revenue after deducting variable costs

amount available to cover fixed costs

Breakeven Point

BEP

revenue = expenses

contribution margin = fixed cost

zero operating income

Breakeven Point in Units

Fixed Cost / Contribution Margin per Unit

Contribution Margin per Unit

Selling Price per unit - Variable cost per unit

Breakeven Point in Money

Fixed Cost / Contribution Margin Ratio

Contribution Margin Ratio

Contribution Margin / Sales

CM per unit / Selling Price per unit

Break-Even Analysis

process of finding break-even point

Factors that lower BEP

• increase in selling price per unit

• decrease in variable cost per unit

• decrease in fixed cost

• sales mix - depends on the mix in which the various products are sold

Variable Cost Ratio

Variable Cost / Sales Revenue

Breakeven Point with Target Net Income

in units: (Fixed Cost + Target Net Income) / CM per unit

in money: (Fixed Cost + Target Net Income) / CM Ratio

Breakeven Point with Target Income and Tax Rate (t)

in units: [Fixed Cost + (Target Net Income/ (1 - t)) ]/ CM per unit

in money: [Fixed Cost + (Target Net Income/ (1 - t))] / CM Ratio

Margin of Safety

Budgeted Sales - Breakeven Sales

Operating Leverage

sensitivity of net income to change in sales

higher leverage = higher reliance on fixed cost

Contribution Margin / Net Income

Sales Mix

proportion of each product type sold

expresses the sales of each product as a percentage of total sales

assumed to be stable for BEP and CVP analysis

Weighted Average Contribution Margin

WACM

Contribution margin * weight percentage

Weight Percentage of Sales Mix

Units of Product Sold / Total Units Sold

Breakeven Point for Sales Mix

Fixed Cost / WACM

Absorption Costing

treats all manufacturing costs as product cost regardless of fixed or variable

treats fixed overhead as part of product cost

used by general accounting

GP = Sales - COGS

COGS includes unsold units

Variable Costing

product cost = variable cost

helps predict lowest possible price to recover for production cost

CM = Sales - VCogs - VSAE

VCOGS do not include unsold units

Absorption Cost vs Variable Cost

different ways to present income statement

difference lies in how Fixed Overhead is treated

Product for Absorption , Period for Variable

Absoption_{net income} = Variable_{net income}

Production = Sales

Absoption_{net income} > Variable_{net income}

Production > Sales

Absorption does not take into account unsold units

Absoption_{net income} < Variable_{net income}

Production < Sales

Difference of Absorption and Variable Net Income if P ≠ S

Unsold units * Fixed overhead per unit

Job Order Costing

costing method when many distinct products, jobs, or services are produced

one work in process inventory account

uses job cost sheets

computes the cost of each job per units produced

determines total manufacturing costs each job

Process Costing

costing method for identical/similar units produced

Activity Based Costing

ABC Costing

allocates overhead based on activities involved in making the product

superior method: determines work put into product

identifies high cost drivers

has multiple predetermined overhead rates

Predetermined Overhead Cost

important for estimating overhead costs at the start of budgeting

determined at the start of the period

prevents waiting for the end of the period to compute

Allocation Base

measure such as direct labor hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services

denominator ng POH rate

Predetermined Overhead Rate

POH Rate

Estimated total OH / Allocation Base

Manufacturing Overhead using POH Rate

Cost incurred by Allocation Base * POH Rate

Dealing with Fluctuating Unit Costs

use predetermined Manufacturing Overhead for whole year

Cost Driver

A factor that causes overhead cost

Activity

event that causes consumption of resources

Activity Measure

denominator of POH in ABC Costing

Allocation base of specific activity

Estimated Cost Driver, measures of the amount of activity that drives the costs

Prime Cost

all primary direct costs tied to making the product

Direct Materials + Direct Labor

Conversion Cost

all costs related to transforming materials to finished goods

Direct Labor + Manufacturing Overhead