Key Concepts from Units 6 and 7 in Managerial Accounting

Key Concept Review: Managerial Accounting (Units 6 and 7)

Introduction

• Robin Patrick, course instructor for the accounting team, introduces the review of key concepts from Units 6 and 7.

• Importance of reviewing all content and testing knowledge with interactive questions at the end.

• Emphasis on reading the textbook and completing course learning checks as crucial for success.

• Managerial accounting is the primary focus for the upcoming units, covering terminology and cost-volume-profit (CVP) analysis, which comprises 45% of the assessment.

Unit 6 Overview

• Focus Areas for Unit 6:

  • Cost categories and behavior.

  • Cost-volume-profit analysis (CVP).

Cost Definitions

• Product Costs:

  • Defined as manufacturing costs.

  • Synonymous with manufacturing costs for this course.

  • Examples of Product Costs:

  • Direct materials

  • Direct labour

  • Manufacturing overhead

• Period Costs:

  • Represent non-manufacturing costs.

  • Include selling, administrative, and general costs (e.g., corporate expenses).

Cost Behavior

• Fixed Costs:

  • Remain constant in total regardless of production levels.

  • Example: Rent expense (e.g., $1,000 per month).

• Variable Costs:

  • Remain constant per unit but vary in total with production levels.

  • Example: Cost to produce one unit is $10.

  • For two units, total variable cost = $10 * 2 = $20.

  • If no units produced, variable costs = zero; however, fixed costs remain constant regardless of production volume.

Cost-Volume-Profit (CVP) Analysis

• Definition:

  • CVP analysis calculates profit as the difference between sales revenue and costs.

  • Formula: Profit = Sales Revenue - Variable Costs - Fixed Costs

  • This reflects the income statement's layout.

• Contribution Margin:

  • Defined as sales revenue minus variable costs.

  • Important for covering fixed costs and determining breakeven.

  • Contribution Margin Formula: Contribution Margin = Sales - Variable Costs.

  • Breakeven occurs when Contribution Margin - Fixed Costs = 0.

Important Formulas and Understandings

• Formulas for Calculation:

  • Profit = Sales - Variable Costs - Fixed Costs

  • Contribution Margin = Sales - Variable Costs

  • Contribution Margin per Unit = Sales Price - Variable Cost per Unit

• Ratios to Consider:

  • Contribution Margin Ratio = Contribution Margin / Sales

  • Variable Cost Ratio = Variable Costs / Sales

  • These ratios will always sum to 100%.

Manufacturing Overhead

• Definition:

  • Overhead consists of costs that cannot be directly traced to a specific product, including indirect materials and labor.

• Types of Overhead:

  • Estimated Manufacturing Overhead: Anticipated overhead expenses.

  • Actual Manufacturing Overhead: Recorded expenses during the period.

  • Applied Manufacturing Overhead: Overhead applied to products using predetermined rates.

• Predetermined Overhead Rate Calculation:

  • Rate = Estimated Overhead / Estimated Activity (e.g., direct labor hours).

• Underapplied/Overapplied Definitions:

  • Underapplied: Actual overhead exceeds applied overhead.

  • Overapplied: Applied overhead exceeds actual overhead.

Direct vs. Indirect Costs

• Direct Costs:

  • Costs that can be directly traced to a product/service (e.g., direct materials and labor).

• Indirect Costs:

  • Costs that cannot be directly traced to a single product/service (e.g., shared or common costs).

Unit 6 Example Problem: Predetermined Overhead Rates

• Given data includes:

  • Actual Manufacturing Overhead: $1,100,000

  • Estimated Overhead: $900,000

  • Actual Direct Labor Hours: 350,000

  • Estimated Direct Labor Hours: 400,000

• Predetermined Overhead Rate Calculation:

  • Rate = Estimated Overhead / Estimated Activity = $900,000 / 400,000 = $2.25 per labor hour.

• Applied Overhead Calculation:

  • Applied = Predetermined Rate * Actual Direct Labor Hours = $2.25 * 350,000 = $787,500.

• Comparison to Actual Overhead indicates underapplied: Actual ($1,100,000) > Applied ($787,500).

  • Underapplied amount = $1,100,000 - $787,500 = $312,500.

Unit 7 Overview: Costing Methodologies

• Key Focus Areas:

  • Differences between job order costing, process costing, and activity-based costing (ABC).

Job Order Costing vs. Process Costing

• Job Order Costing:

  • Used for unique/custom projects where costs can be tracked separately.

  • Examples: Building homes, manufacturing airplanes.

• Process Costing:

  • Used for mass production of identical items.

  • Examples: Bottles of ketchup, Hershey Kisses.

Activity-Based Costing (ABC)

• Definition:

  • An overhead allocation method focusing on various cost drivers and activities instead of a single predetermined rate.

• Benefits:

  • Offers more accurate product costs for large and complex organizations.

• Implementation Considerations:

  • Time-consuming and may not be cost-effective unless multiple activities warrant it.

Summary of Key Concepts

• Understand the differences in costing methods: each unique to production scale and nature of items produced.

• Recognize the importance of understanding concepts of fixed, variable, product, and period costs.

• Be proficient in performing and interpreting CVP analysis, including calculating contribution margins and ratios.

• Familiarize with the flow of manufacturing overhead and distinguishing between estimated, actual, and applied costs.

Conclusion

• Students are encouraged to complete the extra practice questions to reinforce understanding of the material.

• Instructors are available for questions and support.