accounting final first

CHAPTER 11

What are the differences between managerial and financial accounting?

Managerial accounting: for INTERNAL users! like managers and others that use the information from inside the system to decide what to do in the upcoming financial year. Managerial accounting creates internal reports as frequently as needed, which means that they don’t need preset times such as quarterly or annually to create reports. This is because they have specific reasons that are used to create specific decisions, rather than just a general financial overview. 

management: 

  • PLANS: look ahead and figure out objectives like maximizing profits 

  • DIRECTS: coordinates activities and human resources

  • CONTROLS: to keep the company on track according to its objectives set in the planning stage

Financial accounting: for EXTERNAL users! like stockholders and creditors, people who are interested in the company, and want to know how it is doing. The financial statements for external users are prepared quarterly and annually and are basically a very condensed overview of the company as a whole.

Managerial accounting: 

  • type of users: 

    • managerial = internal

    • financial = external

  • TQ: which is not an example?

What are product costs? What are period costs? Be able to classify costs into period and product.

Product costs: these are directly used and necessary in the production of a product. These include things like direct materials, direct labor, and manufacturing overhead. Product costs are incurred and recorded as “inventory” (an asset), and are only expensed when the final products are sold (inventory is depleted and expenses go up). When they are expensed, they go under “cost of goods sold”.

  • direct labor

    • wages paid to laborers

  • direct materials

    • materials included in final product

  • manufacturing overhead

    • indirect labor

    • indirect materials

    • depreciation on factoring buildings

    • insurance

    • taxes

    • maintenance

Period costs: are costs that are incurred during the time period but aren’t directly involved with the manufacturing process. These are things like selling expenses or administrative expenses. 

product

  • costs associated with making the inventory

  • costs get expensed when the inventory is sold

  • 3 types

    • direct materials: materials that can be directly traced to the inventory

    • direct labor: direct person hours that went into making the product

    • manufacturing overhead: nuanced costs, necessary to make inventory but cannot easily trace is back to the inventory

  • gets expensed when the inventory is SOLD

    • get rolled up into the inventory account and sits there until you sell it

  • buzzwords:

    • manufacturing

    • plant

    • production

    • factory

period

  • costs NOT associated with making the inventory/manufacturing process

  • GSAcosts

    • general

    • sales 

    • admin

  • buzzwords:

    • general

    • sales

    • administrative

    • office

    • advertising

  • TQ: know the difference between the two, knowing when they get expensed, calculate total product costs from lists

How are product and period costs treated from an accounting perspective? When are they capitalized vs expensed?

Product costs: when they are incurred or bought, they are recorded as “inventory”. Then, they are moved to the finished goods inventory where they stay until the company sells the finished goods. When they are sold, they get expensed/recorded as “cost of goods sold”.

Period costs: they are deducted directly from revenues in the period they are associated with. **

Be able to calculate total product cost, average cost per unit, COGS, and ending inventory for a given period.

Total product cost: direct materials + direct labor + overhead  

Average cost per unit: total product costs divided by units made 

COGS: 

cost per unit x units sold (because cogs is expensed only when sold, not manufactured)

Ending inventory for a given period: total product costs minus COGS

TQ: figure out total costs, can

 

CHAPTER 13

Understand cost behavior (variable, fixed, and mixed).

Variable costs: costs that change depending on level of activity (ex: hourly wages depend on how much product you’re making/how long it takes to make each product)

Fixed costs: costs that do not change depending on level of activity (ex: prices that stay the same no matter what, like rent on a building, usually monthly costs)

Mixed costs: costs that are/can be both variable and fixed (ex: utilities bill, there is a fixed cost portion, but depending on season it can change)

okay

  • fixed: stays the same

  • variable: doubles

  • mixed: changes but not in doubles

Know what a change in activity would do to Total Fixed Costs, Fixed Costs per Unit, Total Variable Costs, and Variable Costs per Unit.

Total fixed costs: total fixed costs stay the same regardless of activity

Fixed costs per unit: fixed costs per unit decreases with an increases in activity levels

Total variable costs: increase with an increase in activity levels

Variable costs per unit: remains constant on a per unit basis 

Be able to calculate total contribution margin, break-even point (in units and in sales $), and desired profit.

Total contribution margin: sales minus variable costs

Break-even point in units: sales (x) - variable costs (x) - fixed costs, solve for x to get break-even point in units

Break-even point in sales dollars: break even point in units x unit selling price

Desired profit: sales price (x) - variable costs (x) - fixed costs = desired profit, solve for x

Total cost: VC/U (units) + fixed costs

 

CHAPTER 14

Be able to explain and identify relevant cost.

Relevant costs are costs that relate directly to your decision, like opportunity costs because each option will determine future net income/loss

Understand relevant, avoidable, sunk, and opportunity costs.

Sunk costs: historical costs that are already spent

Opportunity costs: sacrifices you have to make when choosing an option, means giving up the other option 

Relevant costs: costs and revenues that differ across alternatives Are sunk costs ever relevant in the decision-making process?

Sunk costs are NEVER relevant to the decision making process. They are costs that have already been expensed, and therefore will always exist regardless of what you choose.

 Are opportunity costs relevant in the decision-making process?

Opportunity costs are ALWAYS relevant in the decision making process. They differ across alternatives, and tell you what you would be making/losing per option.

Be able to identify sunk and opportunity costs.

Sunk: costs like historical costs, the previous cost of a machine that you’re deciding to repair or sell.

Opportunity: costs that can be different depending on what you choose, for example, deciding whether to keep selling a product that isn’t as popular or to discontinue production (usually end up continuing to sell it, and some income is better than no income). 

CHAPTER 15

What is a master budget? Know the components of the master budget.

The master budget is a set of budgets that are all related to each other/use the same number and determines if the company met its targets for different expenses. 

It has two types of budgets:

  • operating budgets: smaller individual budgets that create the budgeting income statement, these are for sales and production personnel

    • sales budget

    • production budget

      • direct materials budget

      • direct labor budget

      • manufacturing overhead budget

    • selling and administrative expense budget

    • budgeted income statement

  • financial budgets: tell you about the cash resources needed for fund expected operations or plans, these include the capital expenditure budget, the cash budget, and the budgeted balance sheet

    • capital expenditure budget

    • cash budget

    • budgeted balance sheet

Be able to calculate components of each budget, specifically Sales, cash collections, and amount of borrowing

Sales budget: is prepared first, because all other budgets depend on this one. It gets its information from the sales forecast, which shows potential sales for the company and. The sales budget represents management’s best estimate of sales revenue for the budget period, and if you do it wrong it might have a bad impact on overall net income. For example you can overestimate sales and be left with excess product that now has to be sold at a discounted price. or miss out on potential income because you underestimated sales. In the sales budget you are trying to figure out total sales. You get this by multiplying expected sales by their unit selling price to get total sales (in cash).

Cash collections: the ending cash balance of one period becomes you beginning cash balance of the next period. Companies may collect a portion in one period and then the rest in another. For example, companies may collect 60% in the period it is sold, and then the other 40% in the period after. To get your cash collections, you multiply the sales by the amount to be collected in that period, and add it to all other collections from that period (collections started in other periods).

â–ª Remember: Beg Account +, -, Ending Account

EQUATIONS: 

break even = sales - variable- fixed