ACCT 2123: FINAL EXAM
90 Cards in this Set
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Managerial Accounting
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used internally; US GAAP does not apply
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Merchandisers
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buys and sells finished goods
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Manufacturers
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produce and sell finished goods
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Manufacturing costs
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direct materials, direct labor, manufacturing overhead
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direct materials
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can be physically traced to a product AND it's convenient to do so
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direct labor
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the "touch" laborers, can be easily traced to product
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manufacturing overhead
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everything that is not DM/DL
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period costs
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selling and marketing product (advertising, sales staff, shipping); administrative expense (corporate HQ, executive salaries, clerical costs)
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when activity level changes, total variable costs:
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increase or decrease with increases or decreases in activity
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when activity level changes, total fixed costs:
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remain constant with increase or decrease in activity
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when activity level changes, total mixed costs:
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will do both (has a variable and a fixed component)
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variable cost per unit:
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remains constant
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fixed cost per unit:
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decreases with increased activity (and vice versa)
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committed fixed costs
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long term (depreciation)
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discretionary fixed costs
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can be changed in short run (advertising, research & development)
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in the relevant range:
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short run activity approximates to a straight line
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mixed cost line equation
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y = a +bx (a=total fixed costs, b=total variable costs, x=level of activity, y=total mixed cost)
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high low method
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(high cost-low cost)/(high activity level-low activity level)
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difference between managerial and financial accounting:
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how costs are classified. in managerial, classify by behavior (variable or fixed)
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process costing
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one homogeneous product
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job-order costing
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many different products produced
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predetermined overhead rate (POHR)
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used to apply overhead to jobs, determined before period begins
est total MOH for the period/est total activity
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applied overhead
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POHR x actual activity
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actual overhead
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not known until end of period
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cost flows in job order system
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RM $ -> WIP $ -> FG $ -> COGS $
acct pay $ -> RM $ -> WIP $ -> FG $
WIP $
wages $
WIP $
MOH $
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if applied overhead > actual overhead:
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overhead was overapplied (and vice versa)
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contribution margin ratios
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CM ratio = (total CM)/(total sales)
CM ratio = (unit CM)/(unit selling price)
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how to calculate breakeven point:
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sales = variable expenses - fixed expenses + profits
500x = 300x + 80,000 + 0.......x=400 units
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contribution margin approach (to earn profit)
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unit sales to earn target profit = (fixed expenses + target profit)/(unit CM)
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margin of safety
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margin of safety = sales - breakeven sales
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degree of operating leverage
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degree of operating leverage = (CM)/(net income)
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percent increase in profits
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percent increase in sales x degree of operating leverage
10% x 5.0 = 50%
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sales mix
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most realistic assumption
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assumptions of cost-volume-profit analysis
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1. selling price is constant
2. costs are linear
3. sales mix is constant
4. inventories do not change
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variable costing
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product cost where only the variable product costs are included...DM, DL, and variable MOH
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absorption costing
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DM, DL, variable MOH, fixed MOH
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if units produced < units sold:
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variable > absorption
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if units produced > units sold:
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variable < absorption
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if units produced = units sold:
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variable = absorption
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variable costing income:
absorption costing income:
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only affected by changes in unit sales
influenced by changes in unit sales and unit production
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activity based costing
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allows managers to "manage" overhead costs, useful for making strategic decisions (better understanding of product cost). ABC is strictly internal, very complex
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big difference with ABC
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there are a number of cost pools to allocate to a product
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unit level activity
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performed each time a unit is produced, happens to every single unit
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batch level activity
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performed every time a batch is handled. not about # of units
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product level activity
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add up all products produced, units are NOT products, activities performed to sustain each product (engineering & design work)
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customer level activity
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activities performed to sustain customers (catalogs, sales calls, etc)
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organization sustaining level activity
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activities performed to sustain organization (heating and cooling, IT for factory, accounting and clerical)
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activity rate
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activity rate = (total cost of activity)/(total activity measure)
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advantages of ABC
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1. information generated from ABC is very useful to corporate strategy
2. better understanding of costs
3. identifies areas for process improvement
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limitations of ABC
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1. very expensive
2. does not conform to GAAP, so company will need two product costing systems
3. managers don't understand it, can misinterpret info
4. resistance to change
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profit planning
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purpose is to achieve planned levels of profitability
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advantages of budgeting
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1. define goals and objectives
2. forces executives to plan for future
3. primary means for allocating resources
4. allows company to uncover potential bottlenecks before they happen
5. means to coordinate everyone's activities
6. communication tool
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responsibility accounting
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managers should be held responsible for those items-and only those items-that the manager can actually control
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the master budget (flowchart)
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sales budget
production budget sell and admin budget
DM budget DL budget MOH budget
cash budget
all leading to budgeted financial statements
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retained earnings:
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beginning balance + net income - dividends = ending bal
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standard costs practical standards:
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1. tight but attainable
2. build in a component for employee break time, machine downtime, etc
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setting DM standards:
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price standards: final, delivered cost of materials net of any discount
quantity standards: amount of material required for each unit of finished product. allowance for unavoidable waste
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setting DL standards:
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rate standards: include taxes, fringe benefits
time standards: direct labor time required to complete one unit of product. include time for breaks, clean up, machine down time
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setting variable overhead standards:
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rate standards: POHR variable portion
activity standards: tied to allocation base for POHR
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standard cost variances
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difference between actual and standard costs
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when should material variances be calculated?
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price variance: calculated when DM are purchased
quantity variance: calculated when materials are used in production
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who is responsible for material variances?
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purchasing is responsible for price variances
production is responsible for quantity variances
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who is responsible for labor variances?
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purchasing: poor quality materials
production manager: training, supervision, scheduling, maintenance of equipment
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exceptions:
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poorly trained workers: production department
poor quality materials: purchasing department
poor supervision of workers: production department
poorly maintained equipment: production department
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advantages of standard costs
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1. possible reductions in product costs
2. management by exception
3. improved cost control and performance evaluation
4. better information for planning and decision making
5. simplified book keeping
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disadvantages of standard costs
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1. emphasis on negative may impact morale
2. standard cost reports may not be timely
3. incentives to build inventory
4. favorable variances may be misinterpreted
5. continuous improvement may be more important than meeting standards
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a relevant cost is a future cost that:
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differs between choice alternatives.
never relevant to decision:
1. sunk costs
2. future costs that don't differ
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opportunity costs
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the benefits that are foregone as a result of pursuing some course of action; not actual dollar outlays and are not recorded in formal accounts
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utilization of a constrained resource steps
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step 1: calculate CM/unit
step 2: scarce resource/unit
step 3: calculate CM/scarce resource
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managing constraints
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1. produce only what can be sold
2. at bottleneck:
-improve the process
-add overtime/another shift
-hire new workers or acquire more machines
-subcontract production
3. eliminate waste
4. streamline production process
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joint products
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two or more products produced from a common input
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split off point
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point in manufacturing process where each joint product can be recognized as a separate product
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sell or process further
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continue processing a joint product after split off point as long as incremental revenue exceeds the incremental processing costs incurred after the split off point
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capital budgeting
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planning for significant outlays on long term projects such as purchase of new equipment and introduction of new products
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two categories of capital budgeting:
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screening decisions: does this project meet the minimum threshold for acceptance?
preference decisions: select from screened alternatives
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future value equation
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FV = P(1+r)^n
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present value equation
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PV = (FV)/((1+r)^n)
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annuity
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an investment that involves a series of identical cash flows at the end of each year
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typical cash outflows
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1. repairs and maintenance
2. initial investment
3. incremental operating costs
4. additional working capital need (current assets - current liabilities = working capital)
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typical cash inflows
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1. incremental revenues
2. salvage value
3. reduction in costs
4. released working capital
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is depreciation a current outflow
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NO!
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cost of capital
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the most appropriate choice for the discount rate...average rate of return the company must pay to its long-term creditors and stockholders for the use of their funds
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calculate net present value (NPV)
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1. calculate PV of cash inflows
2. calculate PV of cash outflows
3. subtract outflows from inflows
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if NPV is positive:
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acceptable, return > required rate of return
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if NPV is zero
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acceptable, return = required rate of return
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if NPV is negative
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unacceptable, return < required rate of return
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internal rate of return
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rate of a return promised by an investment project over its useful life. computed by finding the discount rate that will cause the NPV to equal zero
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payback method
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length of time that it takes for a project to recover its initial cost
payback period = (investment required)/(net annual cash flow)
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simple rate of return method
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ACCRUAL NOT CASH. does not focus on cash flows, focuses on accounting income
SRR = (incremental revenues - incremental expenses including depreciation)/(initial investment)
depreciation: SL = (investment-salvage)/years
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best methods
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NPV and internal rate of return, between two, NPV is best
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ACCT 2123: FINAL EXAM