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ACCT 102: EXAM 1
Who are the users of managerial accounting? |
Internal users |
Who are the users of financial accounting? |
External users |
Why do internal users need information? |
To plan, direct, and control business operations. |
What type of user desires global information? |
External. |
What kind of accounting records does the SEC and FASB regulate? |
Public financial reporting practices.
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Define the value added principle? |
Engaging in an activity if the value it creates is greater than the cost of doing it.
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What is the biggest concern of managerial accounting? |
Determine product cost. |
Give some examples of a question that could be answered using product costing? |
Are costs higher or lower than expected? Who is responsible for the variances between expected and actual costs? What actions can be taken to control the variances? |
What costs must you add up to get the total cost of making a product? |
Materials, labor, and overhead. |
Define overhead? |
Other resources such as utilities and equipment consumed in the process of making the products. |
When are expenses realized? |
When goods are sold. |
How to calculate average cost per unit? |
Total costs of units / number of units.
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Why is the exact cost per good not calculated? |
Because the amount of effort it would take to measure the cost of every detail about an individual good's production process would be far too costly and time intensive. |
How are sold products reported as? |
Cost of goods sold. |
How are unsold products reported as? |
Inventory. |
What are the non produced related costs that are expensed in the period of which they occur? |
General operating costs, selling and administrative costs, interest costs, and cost of income taxes. (SG&A) |
Define raw materials? |
Material used to make products.
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Define direct raw materials? |
Costs of materials that can be easily and conveniently traced to products are called direct raw materials costs.
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Define selling and administrative expense? |
Salaries paid to selling employees and other costs associated with selling the product.
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Define production labor costs? |
Salaries paid to employees who are part of the production costs.
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Where is the depreciation of office furniture depreciated to? |
The depreciation is treated as an expense. |
Where is the depreciation of manufacturing equipment depreciated to? |
Split between the income statement and balance sheet. ***CHECK IF THIS IS CORRECT *** |
Define period costs? |
Non product expenses that are expensed in the period that they occur. |
Define indirect costs? |
Costs that cannot be traced to products or services.
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Define manufacturing overhead? |
Indirect costs used to make products. |
What is Gross Margin? |
Revenue - Cost of Goods Sold |
What is Net income? |
Gross Margin - SG&A
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Define cost allocation? |
Divide the total cost into parts, and assigning those parts to relevant cost objects. For example, proportionally dividing utility costs to products based on the amount of time it takes to produce them. |
Define upstream costs? Give an example. |
Costs that occur before the manufacturing process begins. For example, research and development.
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Define downstream costs? Give an example. |
Costs that occur after the manufacturing process is complete. For example, transportation, advertising, sales commissions, and bad debts. |
What is the primary difference between a manufacturing entity and a service company? |
Products produced by service companies are consumed immediately. Service companies will not have inventories of products. (Burger king doesn't store hamburgers after cooking them...) |
What are some obvious and hidden inventory holding costs? |
Financing, warehouse space, supervision, theft, damage, and obsolescence. Hidden costs can include diminished motivation, sloppy work, inattentive attitudes, and increased production time. |
Define just in time (JIT) manufacturing? Give an example where it is often used. |
When a production is finished right as the customer is going to take possession of the product. One example would be fast food. |
Define opportunity cost? |
Cost associated with giving up something (sales), may result in reduction of gross margin. |
What are three things that temporary effects on financial statements can effect? |
Availability of financing, management motivation, and income tax considerations.
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What are the three elements typically present when fraud occurs? |
The availability of an opportunity, the existence of some form of pressure leading to an incentive, the capacity to rationalize. |
Below this point is chapter 2 notes. |
Answer to chapter 2 notes. |
Define fixed cost? |
A cost that does not change when volume changes.
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Define variable cost? |
A cost that changes when volume changes.
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Define cost behavior? |
How costs behave relative to the level of business activity. |
What is the difference between total fixed cost and fixed cost per unit? |
Total fixed cost does not change, but fixed cost per unit changes depending on the number of units. |
Define operating leverage? |
Techniques used to make small changes in revenue into massive changes in profitability. Typically achieved by eliminating variable costs.
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Define variable cost per unit? |
A constant cost that is created with each additional added unit. Per unit variable cost stays the same, but the total variable cost is variable. |
Define the risk reward relationship between fixed and variable costs. |
Fixed costs add operating leverage, but pose a risk if sales are low. Variable costs do not offer operating leverage, but provide forgiveness if sales are low. Therefore variable costs should increase earnings volatility. |
Define Contribution Margin? |
Sales revenue - Variable costs.
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What does the contribution margin represent? |
The amount available to cover fixed expenses and thereafter to provide company profits. |
Using a contribution margin approach, how do you calculate Net Income? |
NI = CM - FC |
How to calculate the magnitude of operating leverage? |
MOL = CM / NI |
What is the implication of the magnitude of operating leverage? (What does it mean if profits go up or down x%) |
OL acts as a multiplier to Changes in Net Income based on % changes in sales revenue. For example, If a company had an OL level of 10, and sales revenue doubled, this would result in NI doubling.
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Define semi variable cost, also called mixed cost. |
A cost that includes both fixed and variable components that vary with the volume of activity.
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Give an example of a mixed cost? |
A janitorial company charges a $100 base fee, then $20 per hour. The base fee is fixed, but the total cost here will vary depending on how long it takes to get the job done.
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Define relevant range? |
The range of activity over which the definitions of fixed and variable costs are valid. |
Give an example of a relevant range? |
ABC music rents a music hall with capacity for 4000 guests. Ticket sales far exceed 4000, therefore ABC music must then rent a larger music hall. In this case. The relevant range is 1-4000. |
What determines whether a fixed cost can turn into a variable cost or vice versa? |
Activity Base. |
Define cost averaging? |
Averages pricing over time. The idea is to set your prices at a level where your average daily profit over the time period is at the desired level. This means some days will have high profits, other days may have low profits or even a loss.
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Why must estimation methods be used to figure out how much of a cost is fixed vs variable? |
For small companies, keeping track is reasonable, but for large companies it can make book keeping ridiculously horrendous.
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How to use the high low method to estimate variable and fixed costs? |
From a look back period, assemble a table that shows the total cost per month for that period. Then take the highest total cost and subtract from it your lowest total cost. Then take the difference in cost for this period and divide it by the difference in volume for this period. This is the variable cost per unit. Now multiply the estimated cost per unit into the largest sales volume. This is the estimated total variable cost. Then do the total fixed cost minus the total estimated variable cost and you will arrive at the estimated total fixed cost.
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What are the pros and cons of the high low method? |
Simplicity is a pro, but a con is inaccuracy caused by non representative data. |
What is the purpose of the visual line, |
It is used to guess what line best fits the points. Regression using least squares may be a dramatically better alternative.
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On the visual line, what is the total fixed cost? |
The y intercept. |
Define break even point? |
Where the profit equals 0. No Net profit or net loss has occurred. |
Define the equation method. |
(Number of units sales price) - (Variable Cost per unit number of units) - Fixed Costs = 0, Solve for number of units. This equation will tell you how many units you need to sell in order to break even. |
Define contribution margin per unit? |
Sales price per unit minus variable cost per unit. Shows how much money from each unit goes to paying the fixed costs.
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How can we express the break even point in dollars? |
The contribution margin ratio method.
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Define the equation to calculate the contribution margin ratio? |
Contribution margin / sales |
How do we use the contribution margin ratio to calculate the break even level? |
Fixed Costs / Contribution margin ratio. This number will result in the amount of sales revenue that is needed in order to break even. |
Define cost plus pricing strategy? |
The normal policy is to price products at variable cost + 50%. |
Define prestige pricing? |
Many people will pay a premium to be the first to use a new product. |
Define target costing? |
First determine the price which the market will accept, then produce the product at cost that will allow the firm to make a profit? |
What method is used to visually analyze projections? |
CVP graph (Cost-Volume-Profit).
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What are the three lines you must draw on a CVP graph? |
Total sales, total cost, fixed cost. |
How do you calculate the total sales line? |
Total sales = (x*Selling price) with x being units sold
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How do you calculate the total cost line? |
Total cost = (x * Variable cost per unit) + Fixed Costs |
How do you calculate the fixed cost line? |
Fixed Costs = Fixed cost (This is just a horizontal line)...
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Define the margin of safety? |
The gap between budgeted sales and break even sales. Measures the cushion between budgeted sales and the break even point. It quantifies the amount by which actual sales can fall short of expectations before the company will begin to incur losses. |
How to calculate the margin of safety? |
(budgeted sales - break-even sales)/budgeted sales |
Define sensitivity analysis? |
Investigating a multitude of what-if possibilities involving simultaneous changes in fixed cost, variable cost, and volume.
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Define the weighted average contribution margin per unit? |
Average contribution margin of products calculated based on their percentage share of sales. For example: an item selling with a contribution margin of $2 that makes up 80% of sales would be $1.60 of the weighted average contribution margin. |
Define sales mix? |
The relative proportions in which a company's products are sold.
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How do you use a multi product approach to calculate the break even point? |
Break-Even = Fixed costs / Weighted average contribution margin per unit.
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How do you use a multi product approach to calculate the break even point per product? |
Total units * share of the sales mix
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How to use a multi unit approach in order to calculate the sales volume needed to achieve a specific level of profitability? |
Sales volume in units = (Fixed cost + desired profit)/(Weighted average contribution margin per unit)
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What are the limitations of CVP analysis? |
1. Assumes the selling price is constant, Costs are linear, the sales mix in a multi-product company is constant, inventory levels in manufacturing companies are constant, all CVP variables are within the relevant range. |
Below this point is chapter 4 notes. |
Answer to chapter 4 organizer. |
Define cost accumulation? |
Begins with identifying the cost of each object. Then the cost per unit is multiplied by the number of units. This is the total cost of that object. Multiple objects total cost(s) are then summed up to result in the cost accumulation. |
Define cost tracing and cost allocation? |
Attributing the source of the cost of an object. |
Define direct cost? |
Easily traceable to an object. |
Define indirect cost? |
Not easily traceable to an object.
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Define common cost? |
Support multiple cost objects but cannot be directly traced to any specific object.
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Define controllable costs? |
Costs that can be influenced by a managers decisions and actions.
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How to allocate costs to objects? |
Figure out the total cost, divide it by the cost driver. This is the allocation cost per unit. The multiply it by that objects proportion of the cost driver. |
Give an example of cost allocation? |
The rental fee is $18,400 per month. There is 23,000 sq ft. The allocation rate is 0.80 per square foot. If the women's department uses 12,000 square feet, the cost allocation for that object would be 9,600. |
Why is allocating indirect costs individual typically not done? |
It is extremely tedious process and the cost of doing so may be to high.
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What is the solution companies use in order to allocate many different indirect costs? |
Cost pool. |
How should cost pools be structured? |
Pooling should be limited to costs with common cost drivers. |
How should a cost driver be selected? |
It should be selected based on a factor where there is high availability of information, regardless of whether one factor would be more insightful than another. |
How is a store managers salary allocated? |
Equally among departments, because there would be no clear cost driver explanation for that store managers salary. |
What is one of the largest behavioral implications of cost allocations? |
Managers salaries will typically be based on profitability. Therefore managers may try to reallocate how costs are distributed to them in order to increase there bottom line. While this may prove beneficial for the store, it may also create unhealthy levels of competition that hurt business. |
Why might it not make sense to use direct labor hours to allocate costs? |
Direct labor hours to manufacture a good may not be completely explanatory of how to distribute indirect costs. Therefore, it may be better then to use total units because it would remove bias.
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When deciding between different cost drivers what are two things you need to consider in order to decide which is best? |
1. Is there a casual relationship between the cost and cost driver that can be justified? 2. After finding the allocation rates using the different methods, which one produces the least variances between the products. |
What is the object of distributing fixed costs to products? |
To distribute a rational share of the overhead cost to each product. |
Why is the overhead allocation rate called the predetermined overhead rate? |
Because it is determined before actual cost and volume data are available. This is done because often managers have to make decisions using estimates.
Define joint costs?
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Define joint costs? |
Costs that include both the not only the material costs but also the labor and overhead costs of converting the materials into separate products. |
Define split-off point? |
The point in the production process at which products become separate and identifiable. |
How calculate the allocation of a joint cost? |
Add the two or more costs of making multiple products together. Then get the volume of the products manufactured. The first number here is the total cost to be allocated. Just divide from this number the units manufactured and this is the allocation rate. |
Why would a company create joint costs to allocate to multiple products in the first place? |
Because if they didn't it could create the appearance of significant losses, by dramatically increasing the cost of one product, while lowering the costs of others. It doesn't give a realistic view of how that product actually affects the bottom line. |