ACG 2071 Sudano Final

what are the 3 types of companies ?

- Service Company

- Merchandising Company

- Manufacturing Company

what is the role of management accounting ?

provide relevant information to aid managers in making business decisions

differences between financial & managerial accounting?

Financial =

- helps external users make decisions

-reporting format: GAAP

- Looks to the past(historical focus)

- reliable and objective

- prepared at regular intervals(annually/quarterly)

- focus is on the company

- all about verifability (from CPA's)

Managerial:

- helps internal users (managers)

-reporting format: whatever is useful

-looks to the future

- relevant

- reports by segment/divisons

- reports as needed/relevant

- no formal audit

what is a cost object?

anything we want to know the cost of

what is the difference between direct and indirect costs?

direct: can be traced to cost object

ex. direct labor, direct materials, manufacturing supplies

indirect: cant be traced, so we must allocate these costs

ex. rent, utilities, general office expenses

inventoriable product costs

include only the costs incurred during the "production or purchases" stage of the value chain

ex.

- direct materials

- direct labor

- freight in

- fixed and variable overhead

- cost of merchandise

- customs/duties/ tariffs

- costs of getting product ready for sale

Period Costs

- SAG COSTS!!! (any cost not included in the production or purchases of the product)

ex.

- research & development

- design

- production or purchases

- marketing

- distribution

- customer service

How do period costs(SAG) flow through the financial statements?

expensed on income statement in the period in which theyre incurred, as

- operating expenses /.

- selling & administrative expenses

how do inventoriable product costs flow through the financial statements?

are treated as assets (inventory) on Balance sheet , then expensed in the income statement once the good is sold

prime costs

Direct Materials + Direct Labor

Conversion Cost

direct labor + overhead

what are the 3 types of inventory?

- raw materials inventory

- work in process inventory

- finished goods inventory

income statement of a service company

Revenues - Operating Expenses = Operating Income

income statement of a merchandising company

sales revenue

- COGS

----------------------

= gross profit

- operating expenses

----------------------

operating income

equation for cost of goods sold

beg. inventory

+ purchases

+ freight in

+ import duties

--------------------

COG available for sale

- ending inventory

--------------------

Cost of goods sold!

how do you find the inventoriable product cost of a product?

cost of product

+ freight in

+ import duty

--------------------

inventoriable product cost

Predetermined MOH rate (formula)

estimated total MOH costs

-------------------------------

estimated total allocation base

equation used to allocate MOH to each job in the mean time ?

predetermined MOH rate

x

actual use of allocation base

using the traditional method, when are overhead costs allocated to products?

during the period in which they are incurred

fixed costs

total cost remains constant

varies a per unit basis

(as activity level goes up, per unit goes down)

variable costs

total cost changes per activity level

constant per unit basis

Raw Materials inventory t account

beginning RM inventory

+ purchases of Direct Materials

----------------------------------

raw materials available for use

- ending RM inventory

----------------------------------

DM used

WIP inventory t-account

Beg. WIP inventory

+ DM used

+ DL used

+ MOH

----------------------

Total manufacturing costs

- ending WIP inventory

------------------------

COG Manufactured

finished goods inventory t account

Beg. Finished goods inv

+ COG manufactured

----------------------------

COG Available for sale

- ending FG inv.

-----------------------------

COGS

^^^^ same as cost of goods sold equation

When allocating MOH to a job, how does the journal entry look?

Debit: WIP inventory

Credit: MOH

what are indirect materials?

MOH

Record the requisition of indirect materials(ex. glue, machine lubricants, janitorial cleaning, supplies, etc.), (how does the journal entry look?)

Debit: MOH

Credit: RM Inventory

Record the use of indirect factory labor (ex. forklift operators, security personnel), (how does the journal entry look?

Debit: MOH

Credit: Wages Payable

how do we close underallocated MOH? what does that mean?

under allocated MOH= COGS were undercosted

Debit : COGS

Credit: MOH

how do we close overallocated MOH? what does that mean?

overallocated MOH= COGS were overcosted

Debit: MOH

Credit: COGS

Using hi-low method specifically, what is the activity level in (x,y)?

x = activity level

Using hi-low method specifically, which represents the cost, x or y ?

y ( its always the cost $ !!!!)

what does hi low method calculate?

firms mixed costs (fixed and variable) by choosing the highest and lowest activity levels

What is the VC/unit in the hi low method formula y=mx+b?

m= slope

how does a mixed cost graph look?

line starts at the y axis (fixed cost) & then goes up evenly (variable cost /unit)

What does the y intercept represent in the hi low method formula y=mx+b?

fixed cost (b)

Whats the most common way to determine cost behavior? whats the most accurate way ?

most common= High low method

most accurate= linear regression

What the contribution margin formula ?

difference b/w selling price & variable cost

SP-VC

what is the contribution margin ratio?

CM/unit

----------

SP/ unit

as activity level increases, total fixed expenses...

stay the same

as activity level increases, fixed expenses per unit ....

decrease

as activity level increases, variable costs per unit ....

stay the same

as activity level increases, total variable costs .....

increase

Of the various techniques used to estimate a firm's mixed costs, which is generally the least precise?

high low method

as costs increase, break even point....

increases

as costs decrease , break even point....

decreases

As contribution margin and selling price increase, break even....

decreases

as contribution margin and selling price decrease, break even .....

increases

# units needed to break even (formula)

(FC + op. income)

----------------------------

(CM/ unit)

$$ needed to break even (formula)

(FC + op. income)

----------------------------

CM ratio

formula for margin of safety

target sales - breakeven sales

(has to be in sales , not units !!!)

break even means when the operating income =......

0

how do you show margin of safety as a %?

margin of safety

--------------------

target sales

what are the 5 different types of decisions in chapter 8?

- special order

- keep or eliminate segment

- make vs. buy

- sell vs. process further

- optimal use of limited recourses

what is a special order decision? how do you solve it?

- when you're deciding wether or not to take on a one-time special order

- draw 2 columns side by side

1. additional revenue

2. additional costs (use relevant costs aka VARIABLE only, ignore irrelevant costs aka fixed costs)

---additional revenue> additional cost= accept it

---additional revenue< additional cost= reject it

what is the keep or eliminate a segment decision?

- decide wether or not to close down a segment (division)

1. compute segment margin for the segment

- segment margin= CM-avoidable costs

(done to see if it can cover its own costs)

2.*if SM is positive= its helping*

*if SM is negative=its hurting*

3. If question dosen't mention being able to expand another segment, you're done !!!

- If it does, determine how much segments CM goes up by a result of the expansion

4. multiply CM by the % of increase in sales the new segment will have as a result of close the other one down

5. get the amt the CM will increase if segment is close & compare to the amt the original segment will give u

- if its larger, you shut down the segment

- if its smaller than the original, you would keep the segment

Whats the segment margin equation? (used in keep or eliminate segment decisions)

CM-avoidable costs

make vs buy decision ? what are the steps to solving it ?

-decide wether to make something ourselves or buy it from another sourcs

1. draw make & buy column

2. write down relevant costs(variable costs) for each & choose cheaper one(unless stated otherwise, dont include fixed costs in this)

- (avoidable costs & opportunity costs go in make column)

Avoidable costs are

relevant costs/ variable costs

costs that if we shut down a segment, will go away

unavoidable costs

irrelevant costs/ fixed costs

costs that if we shut down a segment, still occur

Sell vs. Process Further Decision ?

what makes more, selling a product now or processing it further?

1. additional revenue & additional cost

(always ignore unavoidable costs!!!!)

remember to write just the additional revenue compared to the original it would get; not total revenue!!!

if adtl rev > adtl cost = process further

if adtl rev > adtl cost = dont process further

Optimal Use of Limited Resources Decision process?

- decide which resource to make based upon contribution margin!

1. Find CM of both (whichever is higher you prefer to make) if they give you a constraint, evaluate the highest CM/per constraint to produce first!!!!

AS ALWAYS, IGNORE UNAVOIDABLE COSTS

2. make the better one as much as you can (if theres a constraint make as much as u can until u cant and then switch to 2nd best option

cash flows formula

determines how much cash they need to borrow

total cash available- cash disbursements +financing= ending cash balance

what is the layout of the operating budget?

sales budget

I

operating expenses(SAG)

-----I---------------I-----------------I

Production Purchases(COGS budget)

I

Direct Materials

I

Direct Labor

I

Overhead

Non-cash expenses

1. depreciation

2. bad debt expense

find the purchases budget also means find the _______ budget

COGS budget

operating expenses budget also means _____ budget

SAG budget

Ex.

- sales commissions

- shipping expense

- bad debt expense

- depreciation expense

- administrative salaries

gross profit rate of 80 % also means.....

cogs of 20%

"what you need " formula

what goes out + end inv - beg inv = what you need

what are the budgeted cash collections for may?

cash now + may (credit sales) + april (credit sales) + march (credit sales)

for questions on cash collections and accounts receivable, you use cash _________ and _____ sales

cash collections and credit sales

for questions on cash disburstments and accounts payable, you use cash _________ & __________.

cash disbursements and purchases

cash flows formula

cash available - disburstments + financing = ending cash balance

ROI formula

income

------------

investment

residual income formula

op. income - (% target rate of return masx total assets)

if its positive, its good !

Master Budget Variance

diff b/w master budget and actual

sales volume variance

diff b/w master budget and flexible budget

flexible budget variance

diff b/w flexible budget and actual

if selling division has excess capacity, the lowest transfer price the division would accept is....

their variable cost (avoidable costs)

if selling division is at full capacity, the lowest transfer price the division would accept is...

the market price

Price/Rate Variance Formula

| AP - SP | x AQ

Quantity/Efficiency Variance formula

| AQ - SQ | x SP

NPV formula

PV of all future cash flows - net initial investment

the amount of rate of return a project itself yields (as a %) is......?

its Internal rate of return (IRR)

when solving for IRR, we are trying to find where NPV = ______?

0

If IRR > Discount rate then.....

project is good

If IRR < Discount rate then?

project is bad

If IRR = Discount rate then.....

EGH

If NPV is negative --> number will go up if discount rate goes _______.

down

If NPV is positive --> number will go down if discount rate goes _______.

up

If discount rate foes up or down, the IRR ___________.

is unaffected!

difference b/w screening decisions & preference decisions

screening decision : looks at financial measure (NPV/IRR) & determines if a project is worth it

preference decisions : looks at several projects at once & determines which ones are better or worse than the others

what is the profitability index used for ? formula?

to compare multiple projects (since NPV makes it difficult to)

present value of cash flows

-------------------------------

net investment

(the larger profitability index, the more preferred project)

what is payback period? formula?

how much time must lapse before the initial investment is repaid

IGNORES TVM!!!!

investment

-------------------------

net annual cash inflows

If theres a salvage value for the machinery, would that change the payback period?

NO, b/c salvage value (almost) never affects payback period

whats accounting rate of return (ARR) ? formula? when should you take on the project?

measures an investments average rate of return

IGNORES TVM!!!

savings/year-costs/year

---------------------------

investment

***if ARR is at least the required rate of return, we should take on the project!!!**

including a salvage value ________ accounting rate of return (ARR).

increases!!