Managerial Accounting Chapter 1 Accounting as a Tool for Management o Managerial Accounting gathering and preparing of accounting information that is used within a company to help ensure the organization s goals and objectives are met efficiently and effectively Users of Accounting Internal Users o Users who are within the organization such as managers Better run business Make more efficient External Users o Users who are outside of the organization such as investors and creditors Make decisions about company o Managerial Accounting vs Financial Accounting Managerial Internal users Non GAAP Divisional departmental reports as needed Reports prepared as needs Only seen within the company Future oriented Financial External users Complies with GAAP Company wide reports Historical summary Reports prepared at the end of the accounting period o Use of Managerial Accounting Managerial accounting assists with the following four function of management Planning long term and short term Controlling day to day Evaluation evaluate performance from budget Decision Making Monitoring Strategic Performance Balanced Scorecard o Measurement of success financial and non financial Supply Chain Management o Raw Materials costumers process Just in Time JIT Inventory o Instead of storage Enterprise Resource Planning ERP Systems o Covers all areas of business Chapter 2 Cost Behavior and the Cost Estimation o Cost behavior refers to the way a cost behaves or reacts to change in activity levels The activity levels that drive or cause costs to change are called cost drivers Example selling more or less Cost behavior Patterns There are four common cost behavior patterns o Variable costs o Fixed Costs Cot that changes in total as the cost driver activity changes A variable cost changes in direct proportion to changes in the cost driver activity Volume increases by 50 variable cost increases by 50 A cost that remains constant does not change in total as the cost driver activity changes Volume increases by 50 cost stays constant Discretionary fixed costs are fixed costs that management has the ability to change in the short run Example advertising Committed fixed cost are fixed costs that the company cannot change in the short run Example mortgage payment o Step Costs o Mixed Costs A cost that remains constant for a small range of activity but then changes abruptly once outside of that range of activity A cost that has both a fixed component which remains constant and a variable component which varies as the cost driver activity varies o Variable vs Fixed Costs Example Assume the cost driver is the volume number of smoothies produced and sold each month Ingredients 0 50 per smoothie Rent 2000 per month X X X X Ingredient cost per smoothie 0 50 0 50 0 50 Total cost of ingredients 1000 1250 1500 Number of Smoothies 2000 2500 3000 o Number of smoothies increases cost of ingredients in total increases o Notice that the cost per unit basis remains constant while the total For every additional smoothie increase by the same amount variable costs varies each time Number of Smoothies 2000 2500 3000 Total Cost per rent 2000 2000 2000 o Number of smoothies increases rent remains constant fixed cost o Notice that the total cost of rent is fixed in total while the rent cost per smoothie varies on a per unit basis o HOW A COST BEHAVES IN TOTAL IS THE OPPOSITE OF HOW IT BEHAVES ON A PER UNIT BASIS Cost Estimation o Our goal is to separate the mixed costs into the variable and fixed components o Three methods Scatter graph Method Very subjective Eye balling where line is best fit High Low Method The line is placed through the data so that the data points at the highest and lowest activity points are connected Variable cost per unit of cost driver activity is then calculated followed by the fixed cost Regression Analysis Uses statistical software in order to derive a cost function from all of the historical data Removes subjectivity o Cost function y mx b Once the cost function is determined it can be used to estimate or predict future costs at various levels of activity X HIGH LOW METHOD Electricity Costs Machine Hours Month January February 810 800 1150 1275 1500 1600 1550 1600 1850 1900 2150 2200 March April May June o Calculate the variable cost per machine hour by divided the change in cost between the two data points by the change in activity between the two data points Change in cost Change in activity 2200 1600 1600 800 0 75 per machine hour slope of the line o Calculate the fixed cost by substituting the variable cost per machine hour solved for in the previous step into the cost function at either the high point of the low point Y mx b 2200 0 75 1600 b 2200 1200 b b 1000 o Once the variable cost per machine hour and the fixed cost have been solved for we can put them together into the cost function and use the cost function to estimate future costs assuming we have an estimate of the future cost driver activity levels Y 0 75x 1000 o What is the estimated electricity cost for July if 1800 machines hours are expected to be used Y 0 75x 1000 Y 0 75 1800 1000 Y 1350 1000 Y 2350 Chapter 2 continued o Regression Analysis Uses statistical software in order to derive a cost function from all of the historical data available o Cost estimation and the Relevant Range The rule of cost behavior only holds true within reasonable limits called the relevant range Represents the normal level of operating activity o Rates will change when operating outside of normal operations o Contribution Margin Analysis Sales Revenue Total Expenses Operating income Total expenses include both variable and fixed costs Sales price per unit X number of units Variable cost per unit X number of units Fixed Expenses Operating income Sales price per unit variable cost per unit X number of units Fixed expenses Operating income o Contribution margin per unit sales price per unit variable cost per unit o All related Contribution Margin in total Sales Revenue Variable expenses Contribution Margin per unit Sales price per unit Variable cost per unit Contribution Margin ratio Contribution margin Sales revenue OR Contribution margin per unit sales price per unit o Contribution Margin Example Assume Island Refreshments sells each smoothie for 3 and incurs variable cost per smoothie of 1 80 and fixed cost for Island Refreshments total 4000 per month Smoothie 3 00 Variable cost 1 80 Fixed cost 4000 per month o What is the contribution margin per smoothie o What is
View Full Document
Unlocking...