Managerial accounting exam 1

What do managerial accountants do?

They identify, summarize, and analyze the relevant accounting information needed to maximize value of firm

How do you maximize value of firm

generate profits and net cash inflows

Users (managerial vs financial)

managerial - Internal (managers)

Financial - external (creditors)

time frame (managerial vs financial)

managerial - Future oriented

Financial - historically oriented

information attributes (managerial vs financial)

managerial - relevance & timeliness

Financial - precision/verifiable

entity focus (managerial vs financial)

managerial - segment reports

Financial - company wide reports

Guidance (managerial vs financial)

managerial - doesn't need to follow gaap

Financial - required to follow gaap

Direct Costs

Cost that can be easily, conveniently, and cost effective to trace back to a particular object

indirect costs

Cost that cannot be easily traced

cost object

anything that we want to collect cost data from

Manufacturing Costs

direct materials, direct labor, manufacturing overhead

(Product costs in Gaap, inventoriable)

nonmanufacturing costs

selling costs and administrative costs

(period cost in gaap, expensed)

Prime Cost

Direct Materials + Direct Labor

Conversion Cost

Direct Labor + Manufacturing Overhead

variable cost

As activity level increases, total cost also increases

(Per unit cost remains the same)

fixed costs

Total cost is the same regardless of activity level within relevant range

(Per unit cost will change)

Step Costs

there is a fixed cost on different specific ranges

Mixed Costs

total cost changes with activity level but changes are not proportionate

(per unit cost changes with activity level)

Differential or incremental cost

a future cost that differs between two alternatives

sunk cost

a cost that already occurred and cannot be changed by decisions made now or in the future

oppurtunity cost

potential benefit given up when one alternative is chose over another

Motivation for classifying costs by behavior

1. budgeting/forecasting

2. contribution margin income statement

3. cost volume profit analysis

Computations for COGS

option 1

# of units sold x cost per unit

option 2

Beginning inventory

+ purchases of merchandise

- ending inventory of merchandise

Job Order Costing

Products produced differently

(customized orders)

Process costing

mass production of identical products

Absorption Costing

assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory

Cost of a job

Direct material + Direct labor + Manufacturing Overhead

How is cost of job traced?

DM - via material request form

DL - via time cards

MOH - Predetermined overhead rate

(cost of job includes an estimate)

Predetermined Overhead Rate

Estimated total MOH / Estimated total units cost allocation base for planned production

MOH applied

PDOR x Actual base

Why use estimated data and applied MOH?

1. Timeliness - actual data not available, we need to know cost now

2. Smoothing - MOH would fluctuate if we computed actual rate

Raw Materials T-Account

BB

purchases

(Materials used in production)

Eb

Work in process t account

BB

DM

DL

Applied MOH

(cost of goods manufactured)

adj

reported

Finished goods t account

BB

completed/transfered

(sold)

adj

reported

Manufacturing Overhead t account

Actual MOH

(applied MOH)

adj

under or over applied

Cost of goods sold t account

sold

adj reported

Contribution margin

Sales - Variable Costs

net operating income

contribution margin - fixed costs

Unit contribution margin

sales price per unit - variable cost per unit (p-v)

P Q V?

P = selling price per unit

Q = number of units sold

V = variable cost per unit

Profit

Unit CM x Q - fixed cost

CM ratio x sales - fixed cost

Contribution Margin Ratio

Contribution Margin / Sales

Change in Contribution Margin

CM ratio x change in sales

Change in Profit

CM ratio x change in sales - change in fixed costs

break-even analysis

Equation method:

Profit = unit cm x Q - fixed costs

Formula method:

Unit sales= Fixed expenses / unit CM

Dollar sales = Fixed expenses / CM Ratio

target profit analysis

same as break even however you add target NOI to fixed expenses

Margin of Safety in sales $

current budgeted or actual sales $ - break even sale $

margin of safety in sale$ as a percentage

margin of safety in sales $ / expected or actual sales $

Degree of Operating Leverage

$ Contribution Margin / Net Operating Income

percentage change in NOI

degree of operating leverage x percentage change in sales

The mixed cost formula

y=a+bx

y= total mixed cost (dependent)

a = total fixed cost (y inter)

x = units of activity (independent variable)

b = variable cost per unit (slope)

Traditional income statement vs contribution margin

Traditional:

Has one cogs and uses gross margin

Contribution:

Has multiple cost depending one fixed or variable and uses contribution margin

High-Low Method

Change in cost (high - low) / Change in activity (high - low) = Slope (variable cost per unit of activity)

High-Low Method (2)

Cost at high or low point - (slope x activity at point) = Intercept (fixed cost)

OLS regression

The best line of fit using all data points (strongly affected by outlier)

High-Low Lines

The lines that connect highest and lowest value (may be weird points)

Absorption Costing

Include fixed MOH in product

(Traditional income statement)

Variable Costing

Include fixed MOH in period

(contribution margin income statement)

Why use variable costing?

absorption costing subtracts per unit FMOH for units sold

Variable costing subtracts FMOH as a fixed amount

Reconcile variable and absorption NOI

1. FMOH In ending inventory (FMOH per unit x ending inventory) - FMOH in beginning inventory (FMOH per unit x beginning inventory) = FMOH Deferred + or FMOH released -

2. variable costing NOI

+ FMOH differed

or

- FMOH released

=absorption costing NOI

Net income is higher in absorption costing when

the number of units in inventory is increasing

when production increases, more cost is deffered

Counter incentive to increase production by

1. use variable costing in other forms of performance

2. include a charge for inventory in bonus calculation

3. internal control to prevent over production

traceable fixed cost

fixed cost from the existence of the segment

common fixed cost

cost that support operation of more than 1 segment

segment margin

contribution margin - traceable fixed cost

segment break even

segment traceable fixed expense / segment CM ratio

change in NOI

Change in Contribution margin - Change in fixed cost