Managerial Accounting Exam Review

Managerial Accounting Overview

Definition

Managerial accounting provides both financial and non-financial information to an organization’s managers, enabling them to make informed decisions.

Purpose

The main purposes of managerial accounting include:

• Cost Determination: Understanding and determining the costs associated with products and services.

• Future Planning: Assisting in the planning of future activities and strategic initiatives.

• Performance Comparison: Allowing comparisons between actual results and planned results to assess performance.

Importance of Cost Data

Understanding cost data is crucial for several reasons, including:

• Cost Control: Identifying and controlling costs to improve operational efficiency.

• Performance Evaluation: Assessing the effectiveness of various departments and personnel.

• Profitability Analysis: Analyzing the profitability of products, services, or departments.

• Budget Planning: Helping in the creation and management of budgets.

• Pricing Decisions: Informing pricing strategies based on cost structures.

Types of Cost Classifications

1. Product vs. Period Cost

• Product Costs: These are costs that are included in inventory, directly associated with manufacturing, and expensed as Cost of Goods Sold (COGS) when the products are sold. These costs comprise both direct and indirect costs related to production.

• Period Costs: Non-manufacturing costs that are expensed as incurred on the income statement. This category includes selling and administrative expenses that are not tied to production activities.

2. Direct vs. Indirect Cost

• Direct Costs: Costs that can be easily traced to a specific cost object, such as raw materials and labor directly used in production.

• Indirect Costs: Costs that cannot be directly traced to a specific product or service, such as salaries of maintenance staff or factory overhead.

3. Variable vs. Fixed Cost

• Variable Costs: These expenses change in direct proportion with the level of production, including costs like direct materials or labor.

• Fixed Costs: Costs that remain constant regardless of the production level, such as rent for the facility or salaries of permanent staff.

Cost Behavior Analysis

Cost Behavior Types

• Fixed Costs: Do not fluctuate with changes in production volume, e.g., factory rent.

• Variable Costs: Change in direct relation to production volume, e.g., costs for raw materials.

• Mixed Costs: Contain both fixed and variable components, such as utility bills which include a fixed base charge plus a variable cost based on usage.

Contribution Margin Income Statement

The contribution margin income statement focuses on internal decision-making, breaking down variable and fixed costs clearly. Its structure includes:

1. Sales

2. Less: Variable Costs

3. Contribution Margin

4. Less: Fixed Expenses

5. Net Operating Income

Contribution Margin (CM) can be calculated as:CM = Sales - Variable Expenses.This margin is crucial for understanding how sales contribute to covering fixed costs.

Break-even Analysis

This analysis determines the number of units required to cover all costs. The break-even point is identified where total contribution margin equals fixed costs. For example:

• Trimble Company Analysis:

  • Selling price: $40

  • Variable cost: $24

  • Fixed cost: $32,000

  • Break-even point calculation:

    • CM per unit = $40 - $24 = $16

    • Break-even point = FC / CM per unit = 32,000 / 16 = 2,000 units.

Practice Questions

To ensure a sound understanding of managerial accounting principles, consider the following practice questions:

1. Identify which characteristics are not part of managerial accounting:

   • Focus on internal users.

   • Emphasis on projects and processes.

   • Primarily historical information.

   • Involves monetary and non-monetary data.

2. Distinctions between managerial and financial accounting focusing on:

   • Structure and emphasis on project management.

   • Internal vs. external usage.

   • Focus on planning versus investment decisions.

3. Identify direct and indirect costs in manufacturing:

   • Direct costs include materials and labor.

   • Indirect costs include supervisor salaries and factory overhead.

4. Understand what constitutes product versus period costs for manufacturers, with examples of period costs:

   • Examples include rent and administrative salaries.

5. Calculate contributions and break-even points using provided scenarios.

   • Ensure clarity in understanding how adjustments impact financial outcomes in decision-making scenarios.