Financial Accounting vs Managerial Accounting ACG 2071 Final Study Guide Ch 1 1 Question Conceptual 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 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 Mixed Cost Cost that has both a fixed component and a variable component Cost Estimation Goal is to separate the mixed costs in to the variable and fixed components o 3 methods Visual fit Regression Analysis High Low Method only one on the test o Cost function y total cost m variable cost per unit x activity level of units b total fixed cost High Low Method Identify the highest and lowest levels of activity o o Compute the variable cost per unit the slope of the line o Calculate the fixed cost using either the high point or the low point o Complete the cost equation by showing that Relevant Range Normal level of operating activity o Cost behavior only works within this range Contribution Margin vs Gross Margin o o 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 Ch 3 3 Questions 1 Conceptual Breakeven Analysis loss Equation Method Breakeven Point Sales revenue is exactly equal to total expenses There is no profit or o 3 ways to calculate Equation method contribution margin technique contribution margin ration technique Use this when solving for units 0 Operating Income is set to 0 when using equation method SP Sales Price VC Variable Cost FC Fixed Cost X units o When solving for dollars use ratios Ex S Sales in dollars 6 4000 0 Variable expenses are 60 of sales Fixed expenses are 4000 Contribution Margin Technique Contribution Margin Ratio Technique Margin of Safety o o o o o o o o Cost Volume Profit Analysis CVP CVP Helps managers assess the impact of various business decisions on company profits Target Operating Income o 3 ways to calculate Equation Contribution Margin Contribution Margin Ratio Equation Method o o Use this when solving for units Plug in target operating income SP Sales Price VC Variable Cost FC Fixed Cost X units o When solving for dollars use ratios Ex S Sales in dollars 6 4000 20000 Variable expenses are 60 of sales Fixed expenses are 4000 20000 is the target operating income Contribution Margin Technique Contribution Margin Ratio Technique Ch 4 1 Question Applying Overhead Predetermined Overhead Rate o Application Base A measure that is correlated with overhead costs Common application bases Direct labor hours Machine hours Direct labor costs Units of production Underapplied Overhead Not enough overhead cost was charged to products as they were made o If there is a debit balance in the overhead account more overhead was incurred than was recorded in the Work in Process Inventory account o The inventory cost is too low and needs to be increased o To adjust for underapplied overhead Cost of Goods Sold xxx Manufacturing Overhead xxx Overapplied Overhead Too much overhead cost was charged to products as they were made o o o o o If there is a credit balance in the overhead account more overhead was recorded in the Work in Process Inventory account than was incurred o The inventory cost is too high and needs to be decreased o To adjust for overapplied overhead xxx Manufacturing Overhead Cost of Goods Sold Prorating Underapplied and Overapplied Overhead xxx o This is done when the amount of under overapplied overhead is large o Prorate the accounts that contain overhead work in process finished goods COGS o Steps COGS Add together the ending balances of work in process finished goods and Calculate the percentage of the total represented by each of the accounts Multiply each percentage by the under overapplied amount to determine how much overhead should be charged to each account Ch 7 1 Question Activity Based Costing Activity Based Costing A costing technique that assigns costs to cost objects such as products or customers based on the activities those cost objects require o Activity based costing matches resources consumed with the products that consumed them Activity An event that consumes resources Activity Allocation Rate Method Activity Proportion Method o o o Allocate Costs to Products or Services Ch 8 5 Questions Relevant Information Meets two criteria o Differs between the alternatives o Occurs in the future Avoidable Costs Costs that are incurred under one alternative but are not incurred under the other Avoidable costs are relevant Unavoidable Costs Costs that are incurred under all alternatives Irrelevant Sunk Costs Costs that have already been incurred in the past Irrelevant Decision Making facilities Opportunity Cost The contribution margin of the next best alternative use of the Special Order Pricing A customer offers to purchase a large quantity of the company s product but wants to pay an amount less than the regular sales price Company decides whether to accept or reject the order o If a special order returns a positive increase in income take the order Outsourcing Moving the production of goods or the delivery of services from within the organization to a provider outside the organization o Decisions involving whether to manufacture a good within the company or to have someone else do it are also called make or buy decisions o Watch out for avoidable fixed costs o If the purchase price is less than the avoidable costs to produce outsource Allocating Constrained Resources o Constrained Resource Anything that limits a company s ability to produce products or provide
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