ACG 2071 Final Study Guide Ch 1 1 Question Conceptual Financial Accounting vs Managerial Accounting Internal Users o Managerial Non GAAP Divisional departmental reporting as needed Future oriented Reports prepared as needed o Financial External Users Complies with GAAP Company wide reporting Historical Reports prepared at the end of the accounting period Managerial accounting is the process of identification measurement accumulation analysis preparation interpretation and communication of financial information used by management to plan evaluate and control within an organization Management accounting involves partnering in management decision making devising planning and performance management systems and providing expertise in financial reporting to control and assist management in the formulation and implementation of an organizations strategy Simply managerial accounting is the generation and analysis of relevant information to support managers strategic decision making activities It adds value to the jobs making them more efficient and effective Primary users Managerial Financial Internal managers and decision makers External investors and creditors Mandated None GAAP rules Reporting unit Organizatio n as a whole Organized segments such as divisions locations and product lines Time horizon Past result and future Past results only Timing of information As needed At the end of an accounting period The purpose of accounting financial is to report financial health of the company to external users such as investors Managerial accounting benefits internal users because the reports help the company determine decisions This report is also not disseminated to the general public For example the cost of a TV you are selling The public doesn t need to know that you bought it for 10 and sold it for 1000 GAAP provides a uniform financial layout for external users on the other hand managerial has no set of rules and nothing to compare to Managerial accounting is completely optional However a company is unlikely to be successful if they do not Most managerial decisions are based on an operating segment level because they focus on smaller units of a company Ex Macys and men s shoes Decision makers needs to know about product lines manufacturing plants business segments and operating divisions Managerial helps companies make decisions about their future They use historical amounts but that isn t the only component of it Managerial puts more emphasis on timely delivery of information as opposed to preciseness Receiving a highly accurate statement after the deadline would not be of any help o Managerial accounting is prepared to take advantage of a window of opportunity even if some accuracy is sacrificed The four roles of managers plan control evaluate decision making Managerial accounting aims to help managers do the four roles o Managers participate in both long and short term planning but they establish decisions in long term planning Example where are we now and where do we want to go in the future How can we get there Long term is anywhere from 5 10 year period Ch 2 3 Questions 1 Conceptual Cost Behavior The way a cost reacts to changes in activity levels o Cost Drivers The activity levels that cause costs to change o 4 types of behavior Variable Fixed Step Mixed Variable Cost Any total cost that varies in proportion to a business activity As the level of activity increases decreases the total cost increases decreases o Constant on a per unit basis o Varies in total Fixed Cost Cost that remains constant in total as the cost driver activity changes o Varies on a per unit basis o Constant in total o Discretionary Fixed Costs Fixed costs that can be changed over the short run o Committed Fixed Costs Fixed costs that cannot change in the short run Step Cost Cost that remains constant for a small range of activity but then changes abruptly once outside of that range of activity Costs that are fixed over only a small range For example a cell phone plan For 40 a month you get 500 minutes but if you want to increase your amount of minutes per month you have to go up to the next block of minutes 50 per month for 600 minutes Mixed Cost Cost that has both a fixed component and a variable component Consider the cell phone example above It is 40 for 500 minutes however once you hit 501 minutes you are penalized a fee like 40 per minute you go over The 40 per month is fixed and the 40 per minute over is variable Cost Estimation Goal is to separate the mixed costs in to the variable and fixed o 3 methods Visual fit Regression Analysis High Low Method only one components on the test o Cost function y total cost Y MX B m variable cost per unit x activity level of units b total fixed cost High Low Method o Identify the highest and lowest levels of activity o Compute the variable cost per unit the slope of the line Variable cost per unit change in total cost change in activity You take the highest level of activity subtracted by the lowest level of activity to compute the variable cost per unit or the slope Variable cost per unit change in total cost change in activity Then you can use either the high point or the low point to calculate fixed costs Remember fixed costs are total costs variable costs Relevant Range Normal level of operating activity o Cost behavior only works within this range Contribution Margin vs Gross Margin o Contribution Margin Difference between sales revenue and variable expenses In other words it is the amount that remains to cover fixed expenses and provide a profit Cover fixed costs and give us a profit Operating income sales revenue total expenses Operating income sales revenue total variable expenses total fixed expenses Per unit operating income sales price per unit of units sold variable cost per unit of units sold fixed expenses CM ratio CM sales revenue OR CM per unit sales price per unit o Contribution Form income Sales variable expenses CM fixed expenses operating Shows expenses by behavior not by function The amount of net income will be the same on a contribution format as on a functional income statement o GM Sales COGS GM SAG selling administrative general expenses operating income Ch 3 3 Questions 1 Conceptual Breakeven Analysis profit or loss Breakeven Point Sales revenue is exactly equal to total expenses There is no o 3 ways to calculate Equation method contribution margin technique contribution margin ration technique o Before a company can make a profit it
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