Managerial Accounting First Exam

Role of Managerial Accounting

-The purpose of is to provide useful information to internal managers to help them make decisions that arise as they manage people, projects, products, or segments of the business.

Financial vs. Managerial Accounting

FINANCIAL ACCOUNTING: produces three key financial reports (the bal ance sheet, income statement, and cash flow statement). These three reports ensure that external stakeholders can access the information they need. External stakeholders might include investors and bankers; stock brokers and financial analysts who offer investment assistance; suppliers; labor unions; customers; local, state, and federal governments; and governments of foreign countries in which the company does business. Always historical

MANAGERIAL ACCOUNTING: provides vital information about a company to internal users. Because it is for internal use, it does not have to conform to the restrictions of outside regulation and can be expressed in whatever way is most useful for managers. Information can be reported in dollars, units, hours worked, products manufactured, numbers of defective products, or the quantity of contracts signed. The overall purpose of this information is to enable managers to make more informed and effective decisions. Often forward looking

Functions of Management

plan, implement, control

Manufacturing firms

•Purchase raw materials from suppliers and use them to create a finished product.

Sell finished products to customers.

Merchandising firms

•Sell the goods that manufacturers produce.

•That sell goods to other businesses are called wholesalers.

•That sell goods to the general public are called retailers.

Service companies

provide a service to customers or clients

Ethics

refers to the standards of conduct for judging right from wrong, honest from dishonest, and fair from unfair. Many situations in business require accountants and managers to weigh the pros and cons of alternatives before making final decisions.

Sarbanes-Oxley Act of 2002

primarily aimed at renewing investor confidence in the external financial reporting system. However, it has many implications for managers such as:

1.Reducing opportunities for error and fraud.

2.Counteracting incentives for fraud.

Encouraging good character.

Decision analytics

applies analytical techniques to gain insights from large, complex quantities of data to make more informed business decisions. Three common types of analytics are:

1.Descriptive analytics (showing what has happened)

2.Predictive analytics (forecasting what is likely to happen)

3.Prescriptive analytics (recommending a course of action

Direct costs

Costs that can be easily and conveniently traced to a unit of product or other cost object.

Indirect costs

Costs that cannot be easily and conveniently traced to a unit of product or other cost object.

Variable costs

change, in total, in direct proportion to changes in activity level.

Fixed costs

Fixed costs do not change in total, regardless of the activity level, at least within some reasonable range of activity. Average or per-unit fixed costs vary inversely with the number of units produced or the number of customers served.

Direct Materials

are major material inputs that can be physically and conveniently traced directly to the final product.

Direct labor

cost of labor that can be physically and conveniently traced to the product

Manufacturing Overhead

includes all manufacturing costs except direct materials and direct labor that must be incurred to manufacture a product

The prime cost includes

direct materials and direct labor

The conversion cost includes

direct labor and manufacturing overhead

Types of period expenses

They are nonmanufacturing costs that are things like marketing or selling costs and/or general and administrative costs and are incurred within the period and vary typically.

Relevant costs

those costs and revenues that differ across alternatives

irrelevant costs or sunk costs

costs that do not differ between alternatives

out-of-pocket cost

involves an actual outlay of cash

opportunity cost

the foregone benefit/opportunity of the path not taken. Anytime you choose to do one thing instead of another.

Job Order vs. Process Costing

-the key difference is whether the company's products or services are different or similar

-process costing is used by companies that make standardized or similar products or services; these manufacturers or services distribute costs evenly across the total number of units produced during a period

-job order costing systems are used in companies that offer customized or unique products or services; these capture the unique cost of each individual item produced

materials requisition form

A document that specifies the type and quantity of materials to be drawn from the storeroom and that identifies the job that will be charged for the cost of those materials.

Direct Labor Time Ticket

source document that shows how much time a worker spent on various jobs each week

job cost sheet

a form that records the materials, labor, and manufacturing overhead costs charged to a job

Predetermined overhead rate

Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.

Predetermined Overhead Rate Formula

Predetermined overhead =Estimated total manufacturing overhead cost/estimated total cost driver.

Applied Manufacturing Overhead

Predetermined overhead rate X Actual Cost driver

What are examples of allocation bases?

Direct labor hours, direct labor dollars, machine hours.

What happens to overapplied or underapplied overhead?

It is typically adjusted through the Cost of Goods Sold (COGS).

What is the effect of overapplied overhead on COGS?

It decreases COGS.

What is the effect of underapplied overhead on COGS?

It increases COGS.

What are the stages in the cost flow of manufacturing?

Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

What is included in the Cost of Goods Manufactured (COGM) report?

Direct Materials used, Direct Labor, Applied Overhead, and change in WIP Inventory.

How is job order costing applied in service firms?

Costs are assigned to clients based on billable hours and cost drivers like patient days.

What are examples of indirect costs in service firms?

Admin salaries, rent, utilities, non-billable time, infrastructure.

POHR = $15/DLH. If Job 27 used 28 DLH, how much overhead is applied?

$15 × 28 = $420

Why are billable hours used in service firms?

Billable hours represent direct labor time and help assign costs to specific clients.

What are some indirect costs in service firms that are treated like overhead?

Office rent, utilities, admin salaries, non-billable hours.

Journal entry for purchase of raw materials ($25,000)?

Dr. Raw Materials Inventory $25,000

Cr. Accounts Payable $25,000

Journal entry for issuing $25,000 of DM and $500 of indirect materials?

Dr. Work in Process Inventory $25,000

Dr. Manufacturing Overhead $500

Cr. Raw Materials Inventory $25,500

Journal entry for $6,000 direct labor, $1,500 indirect labor?

Dr. Work in Process Inventory $6,000

Dr. Manufacturing Overhead $1,500

Cr. Wages Payable $7,500

Journal entry to apply overhead to Job 27 ($15 × 28 DLH)?

Dr. Work in Process Inventory $420

Cr. Manufacturing Overhead $420

Journal entry for actual overhead: $1,700 taxes, $1,000 insurance, $800 depreciation?

Dr. Manufacturing Overhead $3,500

Cr. Property Taxes Payable $1,700

Cr. Prepaid Insurance $1,000

Cr. Accumulated Depreciation $800

Journal entry to transfer completed Job 27 to Finished Goods?

Dr. Finished Goods Inventory $XXX

Cr. Work in Process Inventory $XXX

Journal entries to record sale of Job 27 for $350,000 and COGS of $XXX?

a. Revenue:

Dr. Accounts Receivable $350,000 Cr. Sales Revenue $350,000

b. Cost of Goods Sold:

Dr. Cost of Goods Sold $XXX Cr. Finished Goods Inventory $XXX

Journal entry for non-manufacturing expenses: Commissions ($8,000), Advertising ($5,000), Staging ($6,000), Admin ($2,000)?

Dr. Selling Expense $19,000

Dr. Administrative Expense $2,000

Cr. Accounts Payable $21,000

Journal entry to adjust overapplied overhead ($100)?

Dr. Manufacturing Overhead $100

Cr. Cost of Goods Sold $100

What is process costing?

A system used by companies that produce homogeneous products through a series of standardized processes (e.g., canned goods, wine, paper).

What types of companies use process costing?

Manufacturing companies with uniform products and service companies with routine processes (e.g., insurance claims, loan processing).

What is the main document used in process costing?

The Production Report—tracks units, costs transferred in and out, and ending inventory.

What are the 5 steps in preparing a weighted-average production report?

1.Reconcile physical units

2.Convert to equivalent units

3.Compute cost per equivalent unit

4.Reconcile total costs

5.Prepare the production report

What is an equivalent unit?

A measure that expresses partially completed units as a smaller number of fully completed units.

What is the purpose of Step 1 in a production report?

Reconcile the number of physical units:Beginning inventory + Units started = Units completed + Ending inventory

What happens in Step 2: Convert to equivalent units?

Convert partially completed units in ending inventory into full units using % completion.

How do you calculate equivalent units for materials and conversion?

Equivalent Units =

Completed units: count 100%

Ending inventory: units × % completion (for materials/conversion separately)

What is done in Step 3: Calculate cost per equivalent unit?

Cost per Equivalent Unit =(Total costs in beginning inventory + Costs added) ÷ Total equivalent units

What is the formula for cost per equivalent unit (weighted-average)?

Cost per EU =(Total costs from beginning inventory + Costs added this period) ÷ Equivalent units

What happens in Step 4: Reconcile total costs?

Assign total costs to:

Completed units (transferred out)

Ending work in process (WIP)

What is the purpose of Step 5 in the report?

Finalize the Production Report, showing physical flow, equivalent units, cost per unit, and cost assignment.

What are the departments in the example used?

Crushing, Fermenting, and Aging (CFA), followed by Bottling.

What is a transferred-in cost?

Cost assigned to the next department (e.g., CFA → Bottling) as part of that department's input costs.

How do transferred-in costs appear in the Bottling Department?

As part of total cost per unit:

Transferred-in = $990 per barrel

Each barrel = 300 bottles

Transferred-in per bottle = $3.30

What other costs are added in Bottling?

$0.20 per bottle for materials

$0.25 per bottle for conversion costs

What's the total unit cost per bottle in Bottling?

$3.30 + $0.20 + $0.25 = $3.75 per bottle

What was the total cost transferred to Finished Goods?

460,000 bottles × $3.75 = $1,725,000

What distinguishes process costing from job order costing?

Process costing averages costs across large batches of identical products.

Job order costing assigns costs to unique jobs or batches.

What is the main goal of a production report?

To show how costs and units flow through each department and how they are assigned to finished units and ending inventory.

What are the two systems for assigning indirect costs?

Job Order Costing and Process Costing.

What are the 3 steps in a volume-based cost system?

Determine cost driver

Calculate predetermined overhead rate

Assign indirect costs using the overhead rate

How do you calculate the predetermined overhead rate?

Estimated Overhead ÷ Estimated Cost Driver

How do you assign overhead using a volume-based rate?

Multiply predetermined overhead rate by actual cost driver usage.

What is included in total manufacturing cost per unit?

Direct materials + Direct labor + Manufacturing overhead per unit

How do you calculate gross margin?

Sales price - Total manufacturing cost per unit

What is Activity-Based Costing (ABC)?

A costing method that assigns indirect costs based on the specific activities products or services require.

What are the two stages of ABC allocation?

Assign indirect costs to activity pools

Assign costs from activity pools to products using cost drivers

What are activity cost pools?

Categories of indirect cost activities (e.g., machining, setup, quality control).

What are the levels of activity cost pools?

Unit-level: e.g., machining

Batch-level: e.g., setup

Product-level: e.g., engineering

What is a cost driver in ABC?

A factor that causes or relates to the cost of an activity (e.g., machine hours, setups, engineering hours).

What is the goal of choosing a cost driver?

To find a driver with a strong cause-and-effect relationship to the activity.

What are non-volume-based cost drivers?

Drivers unrelated to production volume, such as # of setups or inspection hours.

What are two methods of assigning costs to products in ABC?

Activity-rate method

Activity-proportion method

What is the Activity-Rate Method?

Assign costs by multiplying activity rate by actual activity usage per product.

How do you calculate an activity rate?

Total cost of activity pool ÷ Total activity base (e.g., machine hours)

What is the Activity-Proportion Method?

Assign costs based on percentage of activity base used by each product.

How are activity proportions calculated?

Divide product's usage of driver by total usage for that driver.

What is the advantage of the Activity-Proportion Method?

Useful when only percentages or ratios of activity use are known.

What is the cost driver for the machine setup pool?

Number of setups (batch-level activity)

What is the cost driver for the engineering and quality control pool?

Engineering and inspection hours (product-level activity)

How is a supervisor's salary allocated to pools?

Based on time spent overseeing each activity (e.g., 40% of time = 40% of salary)

How do you compute total manufacturing overhead under ABC?

Add the overhead from all activity pools assigned to the product.

How do you compute unit cost under ABC?

(Total overhead from ABC + Direct materials + Direct labor) ÷ Total units

How is gross margin calculated under ABC?

Sales price - ABC-calculated unit cost

What is the main difference between volume-based costing and ABC?

ABC assigns costs based on activity usage, not just production volume.

Why can ABC provide more accurate costing?

Because it reflects the actual resource demands of different products.

When is ABC most beneficial?

When products consume overhead activities differently or in complex processes.

What is the result of using ABC instead of a volume-based system?

More accurate product costing and gross margin analysis.

Why might the Prius receive more overhead under ABC than the Scion?

It likely uses more complex activities like engineering and setup.