ACCT

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What are the four key assumptions of CVP analysis? 1. Sales price is constant in the relevant range 2. We can classify all costs as fixed or variable 3. Inventory levels will not change 4. The sales mix of products remain constant What is contribution margin? Revenue - variable cost = contribution margin Selling Price - variable cost per unit = contribution margin per unit Contribution margin ratio = contribution margin / revenue Or = contribution margin per unit / selling price LO 2: Use CVP analysis to find breakeven points and target profit volumes. What is the breakeven point and why is it important to managers? Break even is when Sales = Total costs or when operating income = 0 managers want to know how much they need to sell to cover their costs Do you agree or disagree with this statement: "Breakeven analysis isn't very useful to a company because companies need to do more than break even to survive in the long run." Break even is a starting point to help managers determine how much to sell to earn profits. How do you calculate the sales needed to breakeven or earn a target profit? Income Statement Approach: Operating income = Sales Revenue - Variable Costs - Fixed Costs = (selling price*number of unites) - (variable cost per unit*number of units) - FC Shortcut using unit contribution margin: Sales in units = (Fixed costs + operating income)/ contribution margin per unit Sales in dollars = (Fixed costs + operating income)/ contribution margin ratio Contribution margin ratio = Contribution Margin / Revenue or = Contribution Margin Per unit / Selling price **Work E7-21A, Discuss Accounting in the Headlines - Zume Pizza** 1. Contribution margin per unit = 2 - 1.20 = $0.80 Contribution margin ratio = .80 / 2 = .4 or 40% 2. Breakeven sales units = (85000 + 0) / 0.80 = 106250 units Breakeven sales dollars = (85000 + 0) / .4 = 212500 dollars Or (units * selling price) = 106250 * 2.00 = 212500 dollars 3. Sales in units = (85000+22000) / .80 = 133750 units. Graphing CVP Relationships Sales Revenue - Straight upward sloping line from the origin Fixed Cost line - Straight horizontal line Total Cost line - Straight upward sloping line from the point of fixed cost intercept Variable Cost - Area between total cost and fixed cost Break Even point - Point where Sales Revenue line and Total cost line intercept Profit or Loss - Area between Sales Revenue and Total cost AFTER the break even point LO 3: Use CVP analysis to measure the impact of changing business conditions. What if life ends up being different than you had expected? What if you are told that you are getting a raise? What if your rent increases? Break even sales units = Fixed Cost + 0 / Selling price - variable cost per unit CVP can show managers what happens if selling price, variable costs, or fixed costs change. What if? Effect on Unit Contribution Margin Effect on Breakeven Point Sales price decreases DECREASES INCREASES Sales price increases INCREASES DECREASES Variable cost per unit decreases INCREASES DECREASES Variable cost per unit increases DECREASES INCREASES Total fixed costs decrease NOTHING DECREASES Total fixed costs increase NOTHING INCREASES **Work E7-27A** 1. Break even units = Fixed costs + 0/ Contribution margin = 308000 / 2200-500-160 = 200 units Break even sales dollars = 200 * 2200 = $440 000 2. Operating income = Contribution margin - fixed cost = 260 * 1540 - 308000 = $92400 3. Break even units = 308000 + 70 400 / 2200-500-160+220 = 378400 / 1760 = 215 units Break even sales dollars = 215 * 2200 4. Operating income = Contribution margin - Fixed cost = 260 * 1760 - 378400 = $79200 5. They should not implement software control system as it has a higher break even point and lower operating income LO 4: Find breakeven and target profit volumes for multiproduct companies. What is different about the breakeven formula for a company that sells more than one product? Break even point = (fixed cost + 0) / Weighted average contribution margin per unit Weighted average CM per unit = (number of units * CM product A) + (number of Units* CM B) DIVIDED BY (Product A units + Product B units) Find total break even points and multiply it with the sales mix of each product Why can't all of the product's contribution margin ratios just be added together and averaged? Break even sales Dollars = fixed cost + 0 / weighted average CM ratio Weighted average CM ratio = (number of units * CM product A) + (number of Units* CM B) DIVIDED BY (Product A Sales + Product B Sales) ** Work E7-32A** Standard CM = 55 - 45 = $10 per unit Deluxe CM = 85 - 65 = $20 per unit Break even units = Total fixed cost + 0 / weighted average contribution margin per unit Weighted average contribution margin = Total CM dollars / Total units = 3 * 10 + 2 * 20 / 5 = $14 per unit Break even units = 11900 + 0 / 14 = 850 units Sales mix = 3/5th Standard and 2/5th Deluxe Standard break even units = 3/5 * 850 = 510 units Deluxe break even units = 2/5 * 850 = 340 units Total units required = 11900 + 7700 / 14 = 1400 units Standard units = 1400 * 3/5 = 840 Deluxe units = 1400 * 2/5 = 560 LO 5: Determine a firm's margin of safety, operating leverage, and most profitable cost structure. How can CVP analysis provide an indication of company's operating risk? 1. How far away from the break even point are we 2. How dependent is the company in fixed vs variable costs What is "margin of safety"? Cushion or buffer How much our sales can drop before we incur a loss Margin of safety units = expected or actual sales units - break even units Margin of safety dollars = expected or actual sales dollars - break even dollars Margin of safety ratio = Margin of safety sales or units / Expected or actual sales or units Smaller margins of safety pose a higher risk What is "operating leverage"? How dependent we are on fixed costs vs variable costs High operating leverage = more dependent on fixed costs (higher risk) Low operating leverage = more dependent on variable costs (lower risk) Operating leverage = Contribution margin dollars / Operating income % Change in Operating Income = Operating Leverage * % Change in Sales **Work E7-34A** 1. Margin of safety = Expected sales dollars - break even sales dollars Breakeven sales = Fixed cost + 0 / CM ratio = 7500 / 0.60 = $12500 Expected sales = 7500 + 30000 / 0.60 = $62500 Margin of safety dollars = 62500 - 12500 = $50000 2. 50000 / 62500 = 0.80 3. Operating leverage = CM / operating income CM = 62500 * 0.60 = 37500 Operating income = 37500 - 7500 = 30000 Operating leverage = 37500/30000 = 1.25 4. (-0.12) * 1.25 = -15% How do managers choose a cost structure (their mix of fixed vs. variable costs)? Indifference point - The point where fixed costs would equal variable costs Based on number of units of activity If expected units are more than the indifference point then managers should choose to have more fixed costs If expected units are less than the indifference point then managers should choose to have more variable costs **Work S7-17** 1. Indifference point fixed costs = variable costs Fixed cost = 2000 Therefore X= number of cupcakes 2000 = 800 + 0.05 (6*X) X = 4000 Option 1: Fixed cost = 2000 Option 2: Variable cost = 800 + 0.05 (6*3400) = 1820 Prefer Option 2 as it is always going to be cheaper as long as less than 4000 cupcakes aka the indifference point is not exceeded 2. Option 1: Fixed cost = 2000 Option 2: Variable cost = 800 + 0.05 (6*5200) = 2360 Prefer Option 1 as the indifference point is crossed.

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What is decentralization? Describe at least four advantages and two disadvantages of decentralization. Decentralization - operations are broken up into segments and divisions so decision making responsibility has been given to the segment or division manager. Centralization - top management makes all decisions Advantages: 1. Manager expertise 2. Provides training - helps to retain managers 3. Improves customer relation and responsiveness 4. Frees up Top management to focus on strategic planning and higher level decisions for the company instead of day to day activities Disadvantages: 1. Potential duplication of cost - same activities happening across will lead to excess costs 2. Potential problems like Goal Congruence - goals of segment managers in line with top management goals Compare and contrast a cost center, revenue center, profit center, and investment center. Cost center - managers only accountable for costs, For ex: accounting, warehousing, maintenance, production department Revenue center - responsible for generating revenue, For ex: sales department, valet stand, tasters and kiosks Profit center - responsible for revenues and costs, For ex: product line manager, segment manager, retail stores Investment center - responsible for revenues, costs and investments such as long term assets, For ex: Large division, company as a whole **Discuss Accounting in the Headlines - Kohl's** LO 2: Develop performance reports. Describe the layout of a performance report. Report that shows actual results and budgeted data for the items the manager is responsible for. Variance = Actual data - Budgeted Data 1.Always reported as a positive dollar amount 2. Label as favorable or unfavorable through seeing what effect it has on operating income Favorable Variances - cause actual income to be higher than the budget for example if actual sales is higher than budgeted sales or if actual cost is less than budgeted costs or if actual segment margin or operating income is higher than what was budgeted. 0 variances also labelled as favorable Unfavorable Variances - cause actual operating income to be less than budgeted operating income and so on. Segment margin = Revenue - Variable Costs - Direct Fixed Costs Segment margin is for profit centers Give examples of when favorable variances would be "bad" or concerning. Management by exception: Investigating large variances (in terms of dollars or as a percent of the budget) If actual costs are lower due to lower quality products or poor treatment of employees or cutting R and D, this will report lower costs but be harmful towards customer relations or tank their long term profits and sustainability. **Work E10-18A, P10-48A (skip parts 7-8)** P10-48A Variances : Variance % Sales - 46000 F 9.2 F Variable expenses - 13500 U 3.6 U Contribution margin - 32500 F 26 F Direct fixed expenses - 21050 U 4.1 U Segment Margin - 30450 F 40.6 F Allocated fixed expenses - 13500 U 54 U Operating income - 16450 F 33.9 F 2. It is a Profit Center 3. A profit center manager would not be held accountable for common fixed expenses LO 3: Calculate ROI, sales margin, and capital turnover. Review return on investment (ROI) and residual income (RI) calculations ROI= (Operating income)/(Total assets) (Percentage- we can compare it to the target rate of return, ROI of our competitors, ROI of different divisions to each other) ROI=Sales Margin ×Capital Turnover Sales Margin= (Operating Income)/Sales (Percentage- Shows us the profitability for every dollar of sales) Capital Turnover= Sales/(Total Assets) (Number of times- How efficiently we're using assets to generate sales) RI (Residual Income)= Operating Income-(Target Rate of Return ×Total Assets) Minimum Acceptable Income (in Dollars- Positive RI means we are earning more than the minimum acceptable income, zero is also good as you are earning the EXACT minimum acceptable income) Explain potential problems that could arise from using ROI as the incentive measure for managers. What are some specific actions a company might take to resolve this potential problem? ROI = short term focus. Typically calculating using the last year of data More problems- Managers might turn down projects that have a lower ROI than what their current ROI is This is a problem IF the potential project has a greater ROI than the target rate of return Residual income solves this problem since anything zero or above zero is good enough to keep our targets met. **Work E10-20A** Residential 1. ROI = Operating income / total assets = 68000 / 200000 = 34% (Good as it is above target of 25%) 2. Sales margin = Operating income / Sales = 68000 / 850000 = 8% 3. Capital turnover = Sales / Total assets = 850000 / 200000 = 4.25 times 4. ROI = Sales margin * Capital turnover = 0.08 * 4.25 = 0.34 or 34% 5. RI = Operating income - (target rate of return * total assets) = 68000 - (0.25 * 200000) = $18000 Professional 1. ROI = 153300 / 365000 = 42% 2. Sales margin = 153300 / 1095000 = 14% 3. Capital Turnover = 1095000 / 365000 = 3 times 4. ROI = 0.14 * 3 = 42% 5. RI = 153300 - (0.25 * 365000) = $62050 LO 4: Describe strategies and mechanisms for determining a transfer price. When does a company need a transfer price? = Internal sale between two departments/division of the same company Transfer price generates revenue for the SELLING division and a cost for the BUYING division. How can a transfer price be set? 1. Market Price - Price you would pay to buy a similar product from another company. Maximum price the Buying division would be willing to pay. 2. Negotiated Price - Mutually agreed transfer price. 3. Cost-based Price - Charge the variable cost of the selling division. This would give them no profit and there for is the Minimum price the Selling division would sell for. More common would be the Cost PLUS Markup price. (disadvantaging the selling division is not encouraged to control their costs) Goal - Encourage internal transfer if that is cheaper than buying the product from an outside source. **Work E10-24A** 1. Lowest Transfer Price = 22+5 = $27 (variable costs) Highest Transfer Price = $45 (market price) 2. Marked up cost = (22+5+3) + (30 * 0.3) = $39 (30% markup) 3. $45 market price is most likely as they would most likely receive if they sold it outside the company. LO 5: Prepare and evaluate flexible budget performance reports. Why is comparing actual performance to the master budget often an "apples-to-orange" comparison? How can a better comparison be made? If actual units sold does not equal to budgeted units, we are comparing apples to oranges. Flexible budgets - budget based on actual units sold What are different variances that can be reported in a performance report? Master budget variance = Actual amount - master budget amount Flexible budget variance = actual amount - flexible budget amount *Tells us how much of the master budget variance is due to things other than differences in units. Such as : Different selling prices, different variable cost per unit Volume variance = Flexible budget amount (actual units) - the master budget amount (budgeted units) *how much of our total master budget variance is because units sold is different from budgeted units. **Work E10-25A** 1. Budgeted sales price per unit = 165000/55000 = $3 per unit 2. Budgeted variable expense per unit = 88000/55000 = $1.6 per unit 3. Budgeted fixed cost = $68000 4. COPY 9 5. Master Budget Variance = Flexible Budget Variance + Volume variance = 500 + 7000 = $7500 6a. 7000 b. 3500 U c. Cause of higher actual sales revenue = Higher actual sales price d. 0 F LO 6: Describe the balanced scorecard and identify KPIs for each perspective. List and describe the four perspectives of the balanced scorecard. Give examples of key performance indicators (KPIs) for each perspective. Financial perspective - how does the company look to shareholders Financial measures (measures based on dollar amounts, lag indicators- things that happened in the past, examples are ROI, RI, Operating income) Customer perspective - how does the company look to customers. Measures are lead indicators - things that give us an expectation of future performance, examples are Customer Satisfaction measure, Response time to customers, market share (what percentage of sales we have in a given market) Internal Business perspective - what business processes must we excel at to satisfy our customer and financial objectives Lead indicators of how we're doing in terms of innovation, production (quality), and post sales support, examples are Response time, defective products, new products developed Learning and Growth Perspective - can we continue to improve and create value Lead indicators related to employees and data, examples are Employee satisfaction and training, access to data

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Briefly describe a service company, a merchandising company, and a manufacturing company. What inventory do these three types of companies have? Given an example of each type of company (located in Arlington). Service company- does not sell a physical product, sells their time and knowledge. It has no inventory that they sell. They could have supplies inventory which is to help them do what they need to do but it is not for selling. EX: law firm, plumber, banks Merchandisers/ retailers- they buy the products from someone else and resell it to customers. Have merchandise inventory which is closed once its sold EX: auto dealership, Walmart, bookstore Manufacturers- produces the product that they will sell. Inventory is split into Raw materials, work in process, finished goods inventory EX: general motors LO 2: Describe the value chain and its elements. What is the value chain and what are the six types of business activities found in the value chain? Value chain- it is a collection of activities that add value to a firms products or services. All internal activities. 1. research and development (considered starting point) 2. design or engineering 3. produce (producer) or purchase (merchandiser), would not do as a service company 4. marketing for increasing awareness and demand 5. distribution or delivery to get the product to the customers 6. customer service for resolving problems Which type(s) of business activities in the value chain generate costs that (1) go directly to the income statement once incurred, (2) flow into inventory on the balance sheet? Service company- costs will all go directly to the income statement as they occur Merchandiser- purchase costs go to merchandise inventory and when goods are sold the costs move to the income statement aka Cost of Goods Sold. All other costs go to the income statement as they occur Manufacturer- costs related to products first flow through the inventory accounts and then go to the cost of goods sold. All other costs go directly to the income statement. LO 3: Distinguish between direct and indirect costs. What is a cost object? Anything for which you want to track costs. A common cost object is a product or service. It could also be internal things like the individual departments and divisions. Compare direct costs and indirect costs. Give an example of a cost that would be a direct cost for UTA but an indirect cost for the College of Business. Direct costs- costs that can be directly traced to the cost object. These are costs you would not have if there was a particular cost object. Common direct costs for a manufacturer would be things like direct materials and direct labor. Indirect costs- costs that are more difficult to trace to a cost object. This is because these indirect costs are incurred to support a lot of cost objects. These are are things like manager salaries, electricity, property taxes. These are either referred to as indirect manufacturing costs or manufacturing overheads If they cost object was the College of Business Direct costs- professors salaries Indirect costs- janitorial or cleaning staff, advertising or president salaries. **Discuss Accounting in the Headlines - Uber** LO 4: Identify product costs and period costs. What is meant by the term "product costs"? What is meant by the term "period costs"? Why does it matter whether a cost is a product cost or a period cost? Product costs are the costs of producing or purchasing the products that will be sold. These are an asset aka inventory until the products are sold. Cost of goods sold Period costs are all the other costs are are recorded as they occur such as operating expenses, selling and admin expenses so on. Describe the product and period costs of service, merchandising, and manufacturing companies. Service company- no product costs, only period costs Merchandiser- purchase cost is the product cost, all other costs are period Manufacturer- product costs are direct materials, direct labor and manufacturing overheads. Period costs are all other costs such as advertising, costs to run company so on. What are prime costs and conversion costs? Prime costs- all of your direct costs added together (sum of direct materials and direct labor) Conversion- direct labor plus manufacturing overhead ( what cost we had to incur to convert our material into the finished good) A company would not use both of these because they would end up double counting direct labor. **Watch and Discuss How Its Made Video** https://www.youtube.com/watch?v=BfX9Q871P2Q Product costs Direct materials- tomatoes, spices, bottle, label, caps Direct labor- mixer guy, machine operators Indirect costs- engineers for machines, quality control, rent, electricity, maintenance Period Costs LO 5: Prepare the financial statements for service, merchandising, and manufacturing companies. Cost of Goods Sold Calculations (Only for Merchandising and Manufacturing) Merchandising Company Beginning merchandise inventory + Purchases plus freight-in and import duties (if any) = Cost of goods available for sale (Product we could've sold during the period) - Ending merchandise inventory = Cost of goods sold Cost of Goods Manufactured Calculation (not for public knowledge, internal) Beginning work-in-process inventory + Total manufacturing costs incurred (direct materials used + direct labor + mfg. overhead) = Total manufacturing costs to account for - Ending work-in-process inventory = ***Cost of goods manufactured (this amount would be transferred to calculation for manufacturing cost of goods sold) Manufacturing Company Beginning inventory +*** Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory = Cost of goods sold Describe cost flows for service, merchandising, and manufacturing companies. Service company- no inventory so all costs flow through income statement as they occur Revenue - Operating Expenses = Operating Income Merchandiser- purchased product is recorded in merchandise inventory and then it goes to COGS in the time of sale Revenue - COGS = Gross Profit - Operating Expenses = Operating Income Manufacturer- 3 inventory accounts; Raw Materials inventory, Work in Process inventory and Finished Goods inventory Revenue - COGS = Gross Profit - Operating Expenses = Operating Income **Work E2-36B, E2-38B, E2-39B** E2-36B Charismatic Cats Income Statement Year ended xxx Revenue -------------------------------------------1060000 -COGS Opening Inventory------------- 19800 +Purchases --------------------- 636000 + Freight in --------------------- 19500 Cost of goods available------- 675300 - Closing Inventory ----------- (13100) Cost of Goods sold ------------------------------ (662200) Gross Profit --------------------------------------- 397800 -Expenses Website ------------- 53000 Marketing ---------- 33200 Freight Out ----------- 28500 Total Expenses ------------------------------------ (114700) Operating Income --------------------------------- 283100 E2-38B Cost of Goods Manufactured Direct Materials used Beginning Raw materials ------- 25000 +Purchases ----------------------- 79000 Materials available -------------- 104000 - Ending Raw materials --------- (33000) Direct materials used -------------71000 Beginning WIP ----------------------------------------- 42000 +Direct materials Used -------------------------------- 71000 +Direct labor -------------------------------------------- 84000 + MFG Overhead Indirect Labor------------------ 46000 Insurance ----------------------- 7500 Depreciation ------------------- 13100 Repairs and M ----------------- 4400 Mfg overhead -------------------------------------------- 71000 Total Manufacturing Costs to account for ----------- 268000 -Ending WIP --------------------------------------------- (36000) Cost of Goods Manufactured -------------------------- 232000 Cost of Goods Sold Beginning Finished goods ----------------------------- 21000 + Cost of goods manufactured ------------------------ 232000 Cost of goods available for sale ----------------------- 253000 - Ending finished goods -------------------------------- (28000) COGS ----------------------------------------------------- 225000 E2-39B Golden Bay Income Statement Year ended xxx Revenue ------------------------------------- 585000 -COGS -------------------------------------- (225000) Gross Profit --------------------------------- 360000 -Expenses Marketing ------------- 76000 G and A expenses ---- 26500 Total Expenses ----------------------------- (102500) Operating income -------------------------- 257500 E2-23A COGS= 27600-12800= 14800 Costs of Goods Manufactured Opening Raw materials x Purchases 9200 Materials available 9200+x -Closing raw materials (9200+x-3200) =Direct materials used 8600 x= 8600-9200+3200= $2600 Manufacturing company Beginning WIP 0 Direct materials used 8600 Direct labor 3400 Manufacturing Overhead 6300 Total manufacturing cost to account for 18300 -Closing WIP (1700) Cost of goods manufactured 16600 Beginning Finished goods inventory 4900 Cost of goods manufactured 16600 Cost of goods available for sale 21500 -Closing finished goods x = Cost of goods sold 14800 x=6700 LO 6: Describe costs that are relevant and irrelevant for decision making. What makes a cost relevant or irrelevant when making a decision? If you are considering moving to a different apartment, what would be some of the relevant costs? Relevant- 1. Needs to differ between your alternatives 2. Affect the future What is a sunk cost? A sunk cost is a cost that occurred in the past and is always irrelevant **Work E2-28A** a. Relevant b. Relevant c. Irrelevant- purchased in the past so its a sunk cost d. Irrelevant- fixed cost wouldn't change e. Irrelevant- sunk cost f. Relevant- interest would give cash in hand LO 7: Classify costs as fixed or variable and calculate total and average costs at different volumes. Defined fixed and variable costs. Given examples of both from today's video. Fixed costs- Stay the same regardless of the number of units produced or the amount of activity that occurs Example- Rent and Depreciation Variable- Increase in total as production or activity increases Example- Electricity, Direct Materials and labor Calculate total and average costs. Total costs- All of our fixed costs plus ***variable costs ***Total variable cost would be- Variable Cost per Unit x Number of Units Average cost- (Total cost)/Number of Units

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Define variable, fixed, and mixed costs and sketch graphs to show their behavior both in total and per unit of activity. Variable costs are the costs that change in total as the production changes or some other activity changes. Examples: DM, DL and Indirect Materials. For us gasoline, clothes, entertainment costs and food. But variable costs per unit is constant. Fixed costs are the costs that stay the same in total regardless in changes in activity or production. Example: property taxes, straight line depreciation, salaries of supervisors. For us it is Rent and car insurance. Fixed cost per unit is decreased as more is produced as that cost is spread over. Mixed costs are the costs that have variable and mixed components. Example: electricity and water etc. **Work S6-6, Discuss Accounting in the Headlines - Amazon** What is the relevant range and why is it important to managers? Range of activity or production where you normally expect to operate. Bond of volume or activity where the total fixed costs are constant and variable costs per unit is constant. Outside the relevant rang- total fixed costs can change and variable cost per unit can change. Describe step costs and curvilinear costs. Step costs are the costs which are broken down in steps. Curvilinear costs are the costs which is graphed as a curve and not as a straight line. LO 2: Use cost equations to express and predict costs. Total variable cost = Variable cost per unit of activity (v) × Volume of activity (x) Total fixed cost = Fixed amount over a period of time (f) Total mixed cost = vx + f **Work E6-23A** LO 3: Use account analysis and scatterplots to analyze cost behavior. How can a scatterplot help managers understand cost behavior? Scatter plot: graph that shows each point of data cost (y-axis) and the activity volume (x-axis). It helps us identify: How the strong the relationship is between the cost and the activity (approximation of the straight line strong relationship) Outliers Cost is variable, mixed or fixed. strong- there is a pattern. Easily identifies the outliers and approximate the line. weak- no pattern Hard to identify outliers hard to approximate line. Try to identify a different activity to explain the cost. LO 4: Use the high-low method to analyze cost behavior. What is the purpose of the high-low method? What is the key limitation of this method? Rough estimate of the cost equation. We use 2 data points to estimate the equation. Th scan be influenced by the outliers. Quick estimate. Three Steps to the High-Low Method Find slope of the mixed cost line USING HIGHEST AND LOWEST VOLUME POINTS (this is the variable cost component) Variable cost per unit. Slope=Variable cost per unit (v)= (cost (high)-cost (low))/(volume (high)-volume (low)) Find the vertical intercept - where line intersects the y-axis (this is the fixed cost component). Use data from either the high or the low month to solve for fixed cost amount. This means the fixed cost. Total mixed cost (low)=[v ×volume (low)]+ Fixed cost (f), OR Total mixed cost (high)=[v ×volume (high)]+ Fixed cost (f) Write the cost equation using the costs determined in Steps 1-2 Total mixed cost=vx+f **Work E6-34A** LO 5: Use regression analysis to analyze cost behavior. How does regression analysis differ from the high-low method? Regression is going to consider every data point. This gives a much more accurate cost equation. Define the terms "independent variable" and "dependent variable" as used in regression analysis. (x) Independent variable: Cost deliver activity what we expect to drive variable costs. (y) Dependent Variable: total cost is what we are trying to explain. What are the key pieces of information to look for in an Excel regression analysis output? Intercept: where we cross the y-axis: that is the Fixed Cost Slope: variable cost per unit: name of the independent variable, or x variable. R-Squared: how accurate our cost equation is. Range is from 0 to 1. Values of 0.80 or higher indicate reliable cost equation. 80% of the variability in the data is explained by the cost equation. **Work E6-52B** LO 6: Describe variable costing and prepare a contribution margin income statement. A company uses absorption costing for financial statements that are reported externally, but variable costing for internal financial statements. What is the format of these two income statements, and when will the amount of operating income reported differ between them? Absorption costing means traditional income statement. Revenue - COGS = Gross Profit - Operating Expenses = Operating Income. Product costs are DM+DL+ MFG OH Variable Costing Revenue - Variable costs (DM, DL, Var. OH, Var. Operating expenses) = Contribution Margin (less) Fixed Costs (Fixed OH and Expenses) = Operating Income Product costs are DM+DL+Variable OH For Service and merchandisers, the operating income is the same for both these types of income statements. For Manufacturers, if the units produced = units sold, the operating income is the same under both methods. If the units produced > units sold, operating income is higher in Absorption costing If units produced < units sold, operating income is higher in variable costing What are two reasons managers prefer variable costing? Variable costing shows the additional cost producing 1 more unit. Operating income cannot be manipulated by building excess inventory. S6-18 a. An s shaped curve would represent a Curvilinear b. a cost equation resulting from using regression analysis is described as the line of best fit c. Account analysis is a method for determining cost behavior that is based on a managers judgment d. the vertical intercept of a variable cost is 0 e. The R square value is referred to as the goodness of fit statistic f. Step cost are a type of cost behavior that is fixed over a small range of activity and then jumps to a different fixed level with moderate changes in volume g. as the activity level rises and falls Free cost remains constant in total h. committed fixed cost are fixed costs that management has little to no control over in the short run i. the total mixed cost line increases as the volume of activity increases but the line does not begin at the origin k. the high low method uses two data points to arrive at a cost equation to describe a mixed cost l. the free cost per unit is inversely related to the volume of activity m. Total cost = variable + fixed cost

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For what types of products is job costing appropriate? Why? For what types of products is process costing appropriate? Why? Job costing- Costs are tracked for individual jobs. This is done for unique products and services. Can be more expensive in its nature. Would track the 3 costs: Direct Material, Direct Labor, Manufacturing overhead. Process costing- Many identical products being mass produced so they all need to be tracked by processes and then calculate an average cost per product or service. **Watch and Discuss Asics Video** https://www.youtube.com/watch?v=Dm7fnCD5LAE LO 2: Understand the flow of production and how direct materials and direct labor are traced to jobs under job costing. Step 1: Schedule production: Production Schedule- will show when products will be produced or when service will be provided. Step 2: Purchase materials or supplies: Bill of Materials- List materials needed and their quantities for a job Purchase Order- Order placed with supplier for materials Raw Materials Record- Tracks how much raw material is at hand Step 3: Produce products Materials Requisition- request to have materials sent to the factory for a job. This helps us track all the Direct Material cost for the job. Labor Time Records- Records all the labor needed for a specific job. This tracks the direct Labor cost. Job Cost Records- Records all costs for a job, DM, DL, ALLOCATED manufacturing cost. LO 3: Compute a predetermined manufacturing overhead rate and use it to allocate MOH to jobs. What does it mean for a cost to be allocated? Why is manufacturing overhead allocated rather than assigned to specific jobs? Estimate, splitting up or divide the manufacturing overhead costs among many different jobs. Mfg overhead is an indirect cost and it is not traceable to specific jobs which makes it an Allocated cost. Steps to Allocate Mfg OH 1. Estimate total manufacturing overhead costs for the coming year. 2. Select an allocation base and estimate the total amount that will be used during the year. 3. Calculate the pre-determined MOH rate 4. Allocate overhead to each individual job Allocation Base- Should be a cost driver. As the cost driver increases mfg overhead costs should increase too. For Ex; Direct Labor hours, Direct Labor cost, Machine Hours. We need to track this for each job so we can do the allocation. Estimated amounts are used to determine the allocation rate because our actual amounts wont be known until the end of the period When is MOH allocated? Typically allocate once the job is complete. That's when we will know the actual amount of the allocation base used. **Work S3-6 and S3-7** S3-6 1. Predetermined overhead allocation rate = 1 400 000/50000= $28 per Direct Labor Hour 2. Predetermined overhead allocation rate = 1 400 000/1 000 000= $1.4 aka 140% of the Direct Labor Cost 3. Predetermined overhead allocation rate = 1 400 000/40000= $35 per Machine Hour S3-7 1. Actual amount of allocated Direct Labor hour= 51700 x 28= $1 447 600 2. Actual amount of allocated Direct Labor cost= 1 020 000 x 1.4= $1 428 000 3. Actual amount of allocated Machine hour= 39500 x 35 = $ 1328 500 4. Its not 100% accurate or identical. LO 4: Determine the cost of a job and use it to make business decisions. Give at least 5 reasons why manages need to know the cost of a job (this only reflects the product cost). • The cost of a job determines if it is feasible to continue producing the product/service. • Management uses the costs of a job to help control costs. • GAAP requires that companies keep accurate records of their costs. • The costs of a job are used for planning purposes, such as budgeting. Management needs to know the cost of a job to remain competitive in the market. • Management needs to know the cost to assign to Finished Goods Inventory and Cost of Goods Sold when the job is sold. • To determine how to set prices, deal with pricing pressure from competitors, allow discounts for high/volume sales, and bid for custom orders. When would a company want to add non-manufacturing costs to a job cost record? Because of GAAP which requires product costs to first flow through inventory accounts, we would not put non-manufacturing costs on the job cost records. Period costs aka non-manufacturing costs are expended as they occur under GAAP. **Work P3-48A** 1. Job Cost Record Job Number- 298 Customer- ATV Corporation Job Description- 110 TX Tires Direct Materials: Date Requisition Number Amount 6/30 437 600 7/2 439 480 7/3 501 1400 $2480 Direct Labor Date Labor Time Record Amount 6/30 1896 240 7/3 1904 480 $720 * Mfg Overhead Rate= 490 000/17500= $28 x (12+30)= 1176 Manufacturing Overhead Date Rate Amount 7/3 *28 1176 LO 5: Compute and dispose of overallocated or underallocated manufacturing overhead. When is MOH overallocated? When is it underallocated? Overallocated/overcosted- we have allocated too much. We can prove this by comparing our actual overhead which is less than the allocated amount. Underallocated/undercosted- we haven't allocated enough. Our actual overhead is greater than the allocated amount. Describe a situation that may cause manufacturing overhead to be overallocated in a given year. Describe another situation that could cause manufacturing overhead to be underallocated in a given year. Overallocated- underestimated the quantity of the allocation base. Underallocated- underestimated our manufacturing overhead costs -actual overhead is much greater than what we allocate How do we handle overallocated or underallocted MOH? We will adjust COGS -if we allocated too much then we will decrease COGS by the amount we have overallocated -if we allocated too little we will increase COGS by the amount we have underallocated **Work E3-25A** 1. Predetermined overhead allocation rate- estimated mfg overhead cost/estimated machine hours = 630000/90000 = $7 per machine hour 2. Allocated overhead= machine hour rate x actual machine hours = 7 x 56500 = $395500 3. Actual mfg overhead= $508000 -this means we have underallocated by $112500 LO 6: Prepare journal entries for a manufacturer's job costing system. Journal Entry Refresher At least 2 accounts per journal entry First debit then credit debits equal credit DEAD: Debits will increase Expenses, Assets, Dividends (credits will increase everything else) Job Order Costing Journal Entries 1. Purchase Materials Dr Raw Materials Inventory Cr Cash/Accounts Payable 2. Use of Materials Direct-- Dr Work in Process Inventory CR Raw Materials Inventory Indirect- DR Manufacturing Overhead Used CR Raw materials inventory 3. Labor Used Direct-- DR Work In Process Inventory CR Wages Payable Indirect-- DR Manufacturing Overhead CR Wages Payable 4. Other Manufacturing Overhead Costs Actual-- DR Manufacturing Overhead CR Relevant Expense CR Accumulated Depreciation CR Utilities Payable 5. Allocate Manufacturing Overhead DR Work In Process Inventory Cr Manufacturing Overhead 6. Job Completion DR Finished Goods inventory CR Work in Process Inventory 7. Sale DR Cash/Accounts Receivable CR Sales Revenue DR Cost Of Goods Sold CR Finished Goods Inventory 8. Operating Expenses DR Marketing Expense DR Salesperson Salary Expenses CR Cash/Accounts Payable 9. Close of Manufacturing Overhead Accounts- Underallocated: DR Cost of Goods Sold CR Manufacturing Overhead Overallocated: DR Manufacturing Overhead CR Cost of Goods Sold **Work E3-26A and E3-27A** E3-26A 1. DR Manufacturing Overhead 392000 CR Accumulated Depreciation 364000 CR Property Taxes Payable 19500 CR Wages Payable 8500 2. Allocated Overhead= 392000 DR Work in Progress Inventory 395500 CR Manufacturing Overhead 395500 3. Overallocated by 3500 DR Manufacturing Overhead 3500 CR COGS 3500 E3-27A 1. DR Raw Materials Inventory 215000 CR Accounts Payable 215000 2. DR Work In Process Inventory 164000 DR Manufacturing Overhead Used 26000 CR Raw Materials Inventory 190000 3. DR Work in Process 180000 CR Wages Payable 180000 DR Manufacturing overhead 30000 CR Wages Payable 30000 4. DR Manufacturing Overhead 23000 CR Accumulated Depreciation 15000 CR Utilities 8000 5. DR Work in Process Inventory 70000 CR Manufacturing Overhead 70000 LO 7: Use job costing at a service company as a basis for billing clients. How do service firms use job costing? 1. Track direct labor for individual jobs. No other key direct cost as they only provide services 2. All other costs are called indirect costs which should be allocated. Allocation base is typically going to direct labor hours or direct labor cost 3. Journal entries are all going to be written at the end of the period once the jobs are complete. No inventory so all of the costs are expensed as they occur aka period costs. 4. Revenue job price= COST OF JOB + MARKUP of COSTS **Work E3-29A** 1. Direct labor cost rate= Estimated DL cost/ Estimated DL hours = 2 150 000/ 14000 = $154 per DL hour Indirect allocation rate= Estimated indirect costs/ Estimated DL costs = 1 460 000/ 2 150 000 = 0.68 of DL Cost 2. Predicted DL cost= 210 x 154 = $32340 Predicted Indirect Cost= 0.68 x 32340 = $21991 Total Predicted Job Cost= $54331 3. Required Revenue= 54331 + (.25 x 54331) = $67914 P3-49A Part 1: a) Raw Materials Dr 490000 Accounts Payable Cr 490000 b) Work in Process Dr 84500 Manufacturing overhead Dr 30500 Wages Payable Cr 115000 c) Direct Materials Work in Process Dr 227000 Raw materials Cr 227000 d) Manufacturing Overhead Dr 6300 Accumulated Depreciation Cr 6300 e) Manufacturing Overhead Dr 18600 Cash Cr 10600 Prepaid plant insurance Cr 8000 f) Work in Process (84500*60%) Dr 50700 Manufacturing Overhead Cr 50700 g) Finished goods Dr 259900 Work in Process Cr 259900 h) Accounts Receivable Dr 233000 Sales Revenue Cr 233000 Cost of goods sold Dr 165600 Finished goods Cr 165600

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How is a standard cost different from the budget? Standard is the Budgeted cost for one unit of product What advantages might a company experience if it adopts ideal standards? What advantages are there to using practical standards? As an employee, which would you prefer and why? Ideal Standard - standard assuming no waste. Perfect conditions. Used by Lean Companies strive to reduce waste and have high quality. Practical Standard - Standard based on attainable conditions. Considered to be more motivating for employees Companies have to review and update standards at least once a year no matter what standard they're currently following. How do companies calculate standards? Standard Cost of Direct Material Standard Quantity of DM per Unit of Product (how much material we expect to use) x Standard Price of DM per Unit of DM = Standard Cost of DM per Unit of Product Standard Cost of Direct Labor Standard Quantity of DL per Unit of Product (amount of labor we expect to use) x Standard Price of DL per DL Hour = Standard Cost of DL per Unit of Product Standard Cost of Variable MOH 1.Variable MOH Rate= (Total Estimated(budgeted) Variable MOH)/(Total Estimated Amount of Allocation Base) 2. Standard Quantity of Allocation Base per Unit of Product x Variable MOH Rate = Standard Cost of Variable MOH per Unit of Product Standard Cost of Fixed MOH 1.Fixed MOH Rate= (Total Estimated Fixed MOH)/(Total Estimated Amount of Allocation Base) 2. Standard Quantity of Allocation Base per Unit of Product x Fixed MOH Rate = Standard Cost of Fixed MOH per Unit of Product **Work E11-17A** 1. Quantity standard Price Standard Standard Cost per Unit DM = 20 pounds * $2 = $40 DL = 0.10 hours * $23 = $2.30 V OH = 0.20 hours * $30 = $6.00 F OH = 0.20 * $6 = $1.20 TOTAL = $49.50 Variable Overhead Rate = 3000000 / (500000 * 0.20) machine hours = $30 per Machine hour Fixed Overhead = 600000 / (500000 * 0.20) machine hours = $6 per Machine hour 2. Expected Gross Profit = Standard selling price - Standard cost = 75 - 49.50 = $25.50 LO 2: Compute and evaluate direct materials variances. What does the direct materials price variance measure? Who is generally responsible for the direct materials price variance? Describe two situations that could result in a favorable direct materials price variance. Describe two situations that could result in an unfavorable direct materials price variance. Measures differences in actual vs standard price DM price variance = (AP - SP) * AQ (prices based on per unit of DM, quantity based on DM used) Responsible Party is the Purchasing Department Favorable if Actual Price is less than the Standard Price What does the direct materials quantity variance measure? Who is generally responsible for the direct materials quantity variance? Describe two situations that could result in a favorable direct materials quantity variance. Describe two situations that could result in an unfavorable direct materials quantity variance. Measures differences in Actual vs Standard amounts of material used DM quantity variance = (AQ - SQ allowed) * SP Responsible party is the Production Supervisor Favorable if Actual Quantity is less than Standard Price allowed DM Flexible Budget Variance (actual results-flexible budget) = DM Price Variance + DM Quantity Variance If DM quantity purchased is not equal to DM quantity used then the DM price variance is going to be calculated using the DM quantity purchased DM quantity variance is going o be calculated using the DM quantity used **Work E11-22A (1&2), E11-19A** E-11 22A 1. DM Price Variance = (AP - SP) * AQ [dm quantity purchased] = (0.85 - 1.00) * 98000 = $ 14700 F DM Quantity Variance = (AQ - SQA) * SP [actual quantity used] = (98000 - 95000) * 1.00 = $3000 U Adding these two together would give us our Flexible Budget Value. = 14700 F + 3000 U = 11700 F 2. Discount Cheaper Materials Excess supply - lower prices Lower quality potatoes led to more potatoes being needed for production E-11 19A 1. Actual price = 1061760 / 16800 = $63.20 per gram Standard price = $63.30 per gram Actual quantity = 16800 Standard quantity allowed = 16 * 1000 = 16000 grams Dm Price variance = (63.20 - 63.30) * 16800 = $1680 F Dm Quantity variance = (16300 - 16000) * 63.30 = $8990 U LO 3: Compute and evaluate direct labor variances. What does the direct labor rate variance measure? Who is generally responsible for the direct labor rate variance? Describe two situations that could result in a favorable direct labor rate variance. Describe two situations that could result in an unfavorable direct labor rate variance. DL rate variance = (AR - SR) *AH Responsible party is HR or Payroll Could be unfavorable: Due to giving employees a raise, if there was overtime work. Fringe benefits and more skilled employees Could be favorable: Lower skilled workers Pay cut What does the direct labor efficiency variance measure? Who is generally responsible for the direct labor efficiency variance? Describe two situations that could result in a favorable direct labor efficiency variance. Describe two situations that could result in an unfavorable direct labor efficiency variance. DL efficiency = (AH - SHA) *SR Responsible party is production manager Could be unfavorable: Customization may take longer time Untrained or less efficient employee Lower quality material must be thrown or replaced Could be favorable: Higher skilled employee High quality material DL Flexible Budget Variance = DL Rate Variance + DL Efficiency Variance **Work E11-22A (3&4), Discuss Accounting in the Headlines - Just Born** 3. AH - 2100 SHA - 2000 AR - 12.45 SR - 12.15 DL rate variance = (12.45 - 12.15) * 2100 = $630 U DL efficiency = (2100 - 2000) * 12.15 = $1215 U Unfavorable rate variances may be caused by employees having to work overtime. Flexible budget variance = 630 U + 1215 U = $1845 U LO 4: Explain the advantages and disadvantages of using standard costs and variances. List advantages and disadvantages of using standard costs and variances. Advantages: Saves accounting costs (simplifies the bookkeeping process) Useful for the budget process Benchmark Disadvantages: Could be OUTDATED (lack of timeliness or updates) Lean thinking Unintended behavioral consequences LO 5: Compute and evaluate variable overhead variances. What are the two variable manufacturing overhead variances? What does each measure? Who within the organization would be responsible for each of these variances? Variable overhead rate variance = (AR - SR) * AH [hours of allocation base] Measures difference in actual OH cost vs allocated amount Responsible party - Production manager Variable MFG OH examples - indirect materials, maintenance utilities Variable overhead efficiency variance = (AH - SHA) * SR Measure the difference in actual vs standard allowed hours Responsible party - Production manager Total Variable OH Variance = Variable OH rate variance + Variable OH efficiency variance **Work E11-27A (1&2)** 1. Variable OH Allocated = (0.70 * 0.25) * 158000 = $27650 2. Variable OH rate variance = (AR - SR) * AQ Total Actual Variable OH = (682460 - 636000) / 40400 = $1.15 per actual direct labor hour Therefore --- (1.15 - 0.70) * 40400 = $18180 U Variable OH efficiency variance = (AH - SHA) * SR Standard Hours allowed = 158000 * 0.25 = 39500 hours Therefore --- (40400 - 39500) * 0.70 = 6300 U LO 6: Compute and evaluate fixed overhead variances. Total Fixed OH variance = Fixed OH budget variance + Fixed OH volume variance Fixed OH budget variance = Actual Fixed OH - Budgeted Fixed OH Fixed OH Volume variance = Budgeted OH - Standard Fixed OH allocated Favorable IF Budgeted amount < Allocated

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How would you define sustainability? Caring for future generations Replacing what you take and not taking more than you can replace *** The ability of a system to operate in a manner that can continue INDEFINITELY There are three components to the triple bottom line: economic, environmental, and social. Which component do you think is most important? Why? Social - By focus of society today. Giving back to the community. Reviews. Environmental - Growing importance. Look to see if money is invested in environmentally sustainable practices. Excess packaging and wasting/polluting through plastic. The book describes several business reasons for adopting sustainable business practices. Which of these do you think drive most companies to adopt sustainable business practice? Reduce costs Generate new revenue streams Increased market share Improving external image Reduce company litigation costs Attract and retain talented employees Capital **Work E15-9A, E15-24B** a. Social b. social c. environmental d. social e. social f. environmental g. economic h. environmental i. environmental AND economic j. economic k. environmental l. environmental m. social LO 2: Describe sustainability reporting and the GRI framework. What is the current state of sustainability reporting? -Voluntary reporting in US. Certain disclosures are required in some countries. 80% of SMP 500 companies did have CSR (corporate sustainability report) in 2015. -SEC (securities and exchange commission) require companies to disclose material information -Reporting can be a change management tool (furthering change) and provides useful information to stakeholders -G4 guidelines were developed by a group called the GRI ( global reporting initiative) -No audit or assurance requirement -SASB (sustainability accounting standard board) who are trying to standardize reporting topics Where do you think sustainability reporting is heading in the future? Will companies become more transparent, or is sustainability reporting going to be mostly on internal reports? How important do you think the issue is? Required audits for sustainability reporting (more towards required reporting) Requirements may differ for small businesses or large businesses based on how much waste they are producing in proportion One controversial area regarding sustainability is whether organizations should use their sustainability progress and activities in their advertising. What do you think? Shows that the company made changes, customers purchase based on emotions. Too much of it can be qualified as self-gratifying LO 3: Describe EMA systems and their uses and challenges. What is Environmental Management Accounting (EMA) and why might companies want to do this? EMA is a system used to identify, collect, analyze and use information that's needed for decision making. 1. Monetary information 2. Physical data - quantity of emissions, amount of waste generated, amount of water consumed Reasons to track this information: 1. Compliance reasons 2. Costing purposes 3. Strategy development 4. Performance evaluation 5. External reporting The chapter discussed five challenges to implementing an environmental management accounting (EMA) system within an organization. From your viewpoint, which of these challenges seems to be the biggest obstacle to successful implementation? Which challenge is most likely to be the easiest to overcome? Provide your rationale for your answers. 1. Communication issues - employees not sharing information with each other 2. Hidden costs - lots of costs buried in Overheads 3. aggregated accounting information 4. Historical orientation of accounting- EMA wants a future view, opportunity costs 5. Undeveloped field, EMA is not consistently used.

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Learning Objective (LO) 1: Describe and identify information relevant to short-term business decisions. How do managers make decisions? 1. PLANNING - Define business goals - knowing what we are working towards 2. PLANNING - Identify alternative courses of action 3. PLANNING - Gather and analyze relevant information: compare alternatives 4. DIRECTING - Choose the best alternative - recommend from a financial standpoint 5. DIRECTING - Implement decision - managers decide which course of action to take 6. CONTROLLING - Follow-up: Compare actual results with anticipated results What makes information relevant? Information that differs between the alternatives and occurs or pertains to the future What factors would be relevant to a restaurant that is considering whether to make its own dinner rolls or to purchase dinner rolls from a local bakery? Relevant to making dinner rolls- Cost of labor Cooking ingredients Larger cooking space and utensils Relevant to purchasing dinner rolls- Purchase price Transportation price What are some keys to analyzing business decisions? 1.Use Incremental Analysis - we want to determine how operating income differs between alternatives 2.Focus on the relevant revenues and relevant costs 3.Focus on the contribution margin income statements (fixed vs variable) **Discuss Accounting in the Headlines - New England Patriots** Cross out the charges that are both same in type AND value 1. Costs of chartering aircraft - Fuel Chartering costs Staff Cleaning Insurance Airport fees 2. Costs of owning the planes - Maintenance Purchase price of the planes Depreciation Fuel Staff Logos and design Storage and Hangars Cleaning Airport fees LO 2: Describe and apply different approaches to pricing. Key Pricing Considerations • What is your target profit? Desired Profits • How much are customers willing to pay? • Are we a price-taker or price setter? Explain the differences between a price-taker and a price-setter. Price Taker : Generic brand Heavy competition Similar products to competitors Target costing Price Setter : Specific brands Less competition Unique products Cost-Plus pricing Target Costing Follow Market Price Subtract Target Profit Realize what Target Cost they need to charge for said profit What can the company do if actual total costs are more than target total costs? Try to differentiate the product or improve upon it Reduce costs Adjust your desired profit Cost-plus Pricing Total costs Add Target Profit Cost plus Price Desired Profit examples - % of total or variable costs % of return on investment on assets **Work E8-19A** 1. Target Costing - Fierce competition, cookie cutter houses 2. Target Profit - 14% of variable costs Total variable costs = $183000 Target profit = 14% * 183000 = $25620 Market Price = 202000 - Target Price = 25620 Target Cost = 176380 Actual Cost = 183000 Shortfall or loss = $6620 3. Current Variable Costs 183000 +Upgrade cost 20000 Total Costs 203000 +Target Profit (14% of 203000) 28420 =Cost Plus Price 231420 In comparison to the Expected Price 202000 + 35000 = 237000 Should differentiate the prices as they are charging even more than the Cost Plus Price we calculated LO 3: Decide whether to accept a special order. What is a special order? One time order that is charged at a reduced sales price for a one time customer that is purchasing it at a very large volume Key Considerations for a Special Order • Do we have excess capacity to fill this order? • Will the reduced sales price be high enough to cover the order's incremental costs? • Will the special order affect regular sales in the long run? How do you make a special order decision? Two alternatives Either accept the special order Or Reject it Examine relevant costs and revenues Decision Rule : Relevant operating income from special order is positive, accept it If relevant operating income from special order is negative, reject it **Work E8-20A** 1. Accept or reject the special order Relevant Revenue ($25 * 10000) = 250000 -Costs Relevant Variable costs ($30 * 10000) = (300000) Loss = $50000 So REJECT 2. Accept or reject the special order Relevant Revenue ($40 * 10000) = 400000 -Costs Relevant Variable cost (30*10000) = (300000) Relevant Fixed costs = (15000) Profit = $85000 So ACCEPT **Watch and Discuss PWC Pricing Video** https://www.youtube.com/watch?v=Y6mOPVqlQPs LO 4: Decide whether to discontinue a product, department, or store. Key Considerations for Discontinuing Products, Departments, or Stores • Does the product/dept/store provide a positive contribution margin? • Are there any fixed costs that can be avoided if we discontinue the product/dept/store? • Will discontinuing the product/dept/store affect the sales of any other products? • What can we do with freed capacity? OPPORTUNITY COST How do you make a decision about dropping a product/dept/store? Alternatives: Drop the Product Keep the Product Analysis purposes: Relevant revenues, costs, sales impacts on other products, sales or costs from freed up space and other use of those assets **Work E8-23A** 1. Drop or Keep Decrease in Revenue (128000) Decrease in Variable cost 82000 = Decrease in Operating income (46000) So DROP 2. Decrease in Operating income (46000) Decrease in Fixed cost 32000 = Decrease in Operating income (14000) 3. Decrease in Operating income (46000) Decrease in Fixed cost 74000 Decrease in Wood Sales Revenue (15000) = Increase in Operating Income 13000 LO 5: Factor resource constraints into product mix decisions. What is product mix? Constraint- limits production of a product or service, examples would be materials, machine or labor hours, floor space, display space How much of your Sales come from each product and service you provide Key Considerations for Product Mix • What constraint stops us from make (or displaying) all of the units we can sell? • Which products offer the highest contribution margin per unit of the constraint? • Would emphasizing one product over another affect fixed costs or sales of other products? How do you make a decision about product mix? Identifying any products or services we can sell Identify constraints Calculate Contribution Margin per unit of constraint per product or service Decision Rule If there is a constraint, then we should focus on the product with the highest Contribution Margin per unit of the constrained resource If there is no constraint, then we focus on the product with the highest Contribution Margin per unit of the product itself **Work P8-57B** 1. Machine Hours is the constraint We need the Contribution Margin per Machine Hour 2. Deluxe: CM per Unit - 73 Number of Units per hour - 25 CM per Machine hour - 1825 Standard: CM per Unit - 34 Number of Units per hour - 65 CM per Machine Hour = 2240 RECOMMEND STANDARD as it has a higher CM per machine hour Calculate the number of units you can produce of the product you chose to emphasize: 4000 * 65 = 260000 Standard units LO 6: Analyze outsourcing (make-or-buy) decisions. What is the difference between outsourcing and offshoring? Outsourcing - Having someone else produce your product or purchase your service. Domestic or outside the US Offshoring - Having the product made or the service performed overseas. May be done by the company itself or an outsourcer What are benefits and drawbacks of outsourcing? Benefits: Allows the company to focus on the competency, lets us take advantage of company's expertise, reduces investment in equipment or labor Drawbacks: Lose control over the quality of the outsourced product. We lose control over production schedule for the outsourced item and delays in delivery could impact our production times. Reputational consequences to interacting with poor outsourcers who treat employees unfairly. Key Considerations for Outsourcing • How do variable costs per unit compare to outsourcing cost per unit? • Are any fixed costs avoidable if we outsource? • What could we do with the freed capacity? • What volume do we need? How do you make an outsourcing decision? Alternatives Continue to make the product or outsource the product Analyzing the relevant costs and opportunity costs of the decision. Don't focus much on revenue as it would remain constant regardless Decision based on the alternative with the lowest cost How can you determine the maximum acceptable outsourcing price? Indifference point - Point where the cost is the same in both making the product and outsourcing it **Work E8-28A** 1. Make Unit: DM - 8 per unit DL - 1.50 per unit MOH - 1 per unit Purchase price - None Total Cost - 10.50 per unit Buy Unit: DM - None DL - None MOH - None Purchase Price - 8.50 per unit Total Cost - 8.50 per unit CHOOSE TO OUTSOURCE as its relevant costs are lower 2. Make Unit Variable cost per unit - 10.50 per unit Units - 75000 V cost - 787500 Fixed Costs - 455000 Relevant costs - 1 242 500 Buy Unit Variable cost per unit - 8.50 per unit Units - 75000 V Cost - 687500 Fixed Costs (go down by 105000) - 350000 Relevant costs - 987 500 3. Make Units = Buy Units (10.50*75000) + 455000 = (PRICE*75000) + 350000 Price = 11.90 per unit is the price for the indifference point LO 7: Decide whether to sell a product "as is" or process it further. Give examples of products that a company could sell a product as is or process further. Bike Unassembled or Assembled Unfinished furniture or Painted and Constructed Key Considerations for Processing Further • How much revenue will we receive if we sell the product as is? • How much revenue will we receive if we sell the product after processing it further? • How much extra will it cost to process the product further? Irrelevant costs: Costs of the product as is. How do you make a process further decision? Alternatives: Sell the product as is or Process the product further and then sell it Analyze: Relevant revenues and costs If processing further increases operating income we would pick that If processing further decreases operating income we should sell the product as is **Work E8-31A** Sell as is: $8 per gallon $0.16 for packaging Benefit per unit = $7.84 per gallon Units per batch = 7.84 * 540 Operating income = $4234 Process further: $0.56 per individual $0.07 for packaging $0.10 for fruits Benefit per unit = $0.39 per individual Units per batch = 0.39 * 11520 Operating Income = $4493 THEREFORE they should choose to process further as it gives them the higher net operating income. SEGMENT MARGIN INCOME: 1. refers to the result of operating income or loss for each individual product line 2. Unavoidable fixed costs include fixed costs that continue to be incurred even if the product line is discontinued 3. Avoidable fixed costs include costs that may be eliminated as a result of discontinuing the product 4. Contains NO allocation of common fixed costs on the statement.

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List at least 4 reasons why a company would use budgeting. Planning- think about the future and how we expect to perform Coordination- considers company activities that need to take place Communication- informing employees about plan Benchmarking- standard to compare performance, multitasks employees Why does the budgeting process begin with strategic planning? Budget should help managers identify how they will achieve the strategy Compare and contrast "participative budgeting" and "top-down budgeting". Participative budgeting- managers at all levels participate in creating the budget. More detailed plus accurate budget, more employees buy it so more motivation to achieve budget, time consuming process Top down budgeting- top manager decides budget and informs all other managers so less motivation by everyone else to achieve it as they had no say or input What are the differences between the master budgets, operating budgets, and financial budgets? Master budget- collection of all individual budgets Operating Budget - budgets related to day to day operations (sales, production, product costs, operating expenses, income statement) Financial budgets- capital expenditures (long term assets, procedures), cash, balance sheet LO 2: Prepare the operating budgets. Sales Budget Number of Unit Sales x Sales Price per Unit = Total Revenue Production Budget Units Needed for Sales + Desired Ending Inventory (Total units needed) = Total Units Needed - Units in Beginning Inventory (Units we already have) = Units to Produce Direct Materials Budget Quantity of DM Needed for Production (Units to produce * quantity per unit ) + Desired DM Ending Inventory (Raw materials inventory) = Total Quantity of DM Needed - DM Beginning Inventory (Raw materials we already have) = Quantity of DM to Purchase x Cost per unit of DM = Total Cost of DM Purchases **Work E9-22A** Copy Direct Labor Budget Units to be Produced ( From Production Damage) x DL Hours per Unit = Total DL Hours Required x DL Cost per Hour = Total Direct Labor Cost **Work S9-7** Copy Manufacturing Overhead Budget List of all budgeted overhead items Often you will have separate sections for variable overheads and fixed overheads Operating Expenses Budget List of operating expenses Often separate into variable and fixed Budgeted Income Statement Sales Revenue - Cost of Goods Sold = Gross Profit - Operating Expenses = Operating Income - Interest Expense - Income Tax Expense (OPERATING INCOME - INTEREST EXPENSE) * TAX RATE = Net Income TRADITIONAL, ABSORPTION COSTING, FOR EXTERNAL USERS LIKE INVESTORS **Work E9-25A, S9-10** S9-10 Sales Revenue 3480000 - Cost of Goods Sold (2130000) = Gross Profit 1350000 - Fixed Cost (7600) - Operating Expenses (2100) = Operating Income 1340300 - Interest Expense (3300) - Income Tax Expense (534800) = Net Income 802200 LO 3: Prepare the financial budgets. Capital Expenditures Budget Long term asset purchases Expensive purchases, most are depreciated over time Budgeting the amount and timing of the payments Cash Collections (Receipts) Budget Budget showing when cash is received from debtors or customers Sales - cash on delivery (collected in the month it occurs) OR credit sale (collected over time and a portion of it may not be collected aka Bad debts expense **Work E9-28A** COPY Cash Payments (Disbursements) Budget Cash payments in Earlier Budgets : DM purchases Direct labor Manufacturing overhead (except deprecation) Operating expenses Capital expenditures Income taxes Dividends **Work S9-12** DM 83000 DL 35000 MOH 42500 Operating exp 44600 Tax 8600 Total cash spent 213700 Combined Cash Budget Beginning Cash Balance (ending cash balance last month) + Cash Collections = Total Cash Available - Cash Payments = Ending Cash Balance Before Financing Financing: (borrowings and subsequent payments) + New Borrowings - Debt Repayments - Interest Payments = Ending Cash Balance **Work E9-30A** COPY Budgeted Balance Sheet Structure Assets Liabilities + Stockholder Equity Current Assets Current Liabilities Property, Plant, Equipment Long Term Liabilities Acc. Receivable (Credit sales Stockholders Equity not yet collected - Allowance (Beg Retained Earnings Balance + Net for uncollectable amounts) Income - Dividends = Closing RE) Prepaid Items (Beginning balance Accounts Payable (purchases not yet paid) - Expense used in the period) Property plant and equipment (original balance + capital expenditure) Accumulated Depreciation (beginning balance + depreciation this period) **Work E9-32A** COPY What is sensitivity analysis? Why is this helpful for managers? Sensitivity Analysis- "What-if" analysis. Change assumptions and see how our analysis is affected. **Discuss Accounting in the Headlines - NY Fashion Week** LO 4: Prepare budgets for a merchandiser. How is the master budget for a service company different from a manufacturer? Operating budgets- Service companies only have sales, operating expenses and a budgeted income statement. Financial Budgets- The same financial budgets as a manufacturer such as Cash collection, cash payments, combined cash, balance sheet and capital expenditures budget How is the master budget for a merchandising company different from a manufacturer? Operating budgets- Do not have production, direct material purchase, direct labor or mfg OH budgets. Instead they have a Cost of goods sold, inventory and purchases budget: Costs of Goods Sold: +Desired ending merchandise inventory Total inventory they need -Beginning Merchandise inventory Inventory to purchase Financial budgets- same as a manufacturer and a service company How do debit and credit card sales affect the preparation of a master budget? Using a debit or credit card causes a transaction fee. This Transaction fee is an Operating expense. It will appear on the income statement for the company making the sale. In terms of the Cash Collection Budget- it is shown as the net amount collected (Sales - transaction fee)

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What are managers' three primary responsibilities? How are these responsibilities related? Planning- setting goals and objectives they want to achieve. It focuses on the future Directing- managers overseeing day to day business activities and following through with the plan. These have to be activities that help us achieve our goals Controlling- Compare our actual results to our plan/budget. Make adjustments to our activities if needed or when our performance is off course from our goal, comparing on a quarterly or monthly basis It is a cyclical process that is done every year with the budget being prepared once a year How does managerial accounting support these responsibilities? Manegerial accountants are the ones who help prepare the budget, they do the cost to actual profit analysis which is part of planning. Tracking actual costs and revenues- directing Variance analysis of actual vs budget- controlling LO 2: Distinguish financial accounting from managerial accounting. What are differences between financial and managerial accounting? Financial accounting: External users- investors, shareholders, creditors, competitors, suppliers, government for tax Needs to follow GAAP. Reports such as Income statements, balance sheets, retained earnings, cash flows so on. These are usually prepared both quarterly and annually, especially for publicly traded companies Reporting past transactions auditors have to verify how correct it is. Must be auditors from outside company for fair practices Purpose: To help external users make investing and lending decisions Manegerial Accounting: Internal users- managers such as CEO, production so on. Does not have to follow GAAP as it is not disclosed externally Ad Hoc reporting where you prepare whatever report is most appropriate for that time, budgets, prepared as needed, hourly daily so on. Reports what is expected in the future while comparing it to that of the past no requirement for audit, but companies can have internal auditors for accuracy Purpose: to help managers do plan, direct and control and also help those managers make business decisions Why is managerial accounting more suitable for internal reporting than financial accounting? Mangerial accounting relates directly to the business activities, it can also be also more detailed, product or store specific vs financial company specific Mangerial accounting is more timely and it has a future focus LO 3: Describe the roles and skills required of management accountants within the organization. What skills are required of a management accountant? In what college courses are these skills taught or developed? What skills would be further developed in the workplace? 1. Accounting knowledge 2. Critical thinking 3. Good communication skills and leadership 4. technical skills such as computer skills or decision analysis so on Almost all the above will be developed further by being in the workplace How can what is taught in managerial accounting help you in careers other than accounting? Very basic skills such as critical thinking and communication and so on are also needed in a vast majority of other professions such as marketers or operations so on What would a typical organization chart look like? *Board of directors- oversee the company but not employees of the company, elected by the investors *CEO- runs the company on a daily basis *High level executives such as COO (day to day running) and CFO and ClegalO *Manegerial accountants such as treasurers or controllers under the CFO What might be inefficient about having all managerial accountants report to a company's controller? How might the company restructure and what would be the benefits of restructuring? If the controller is unethical or biased then his decisions will trickle down to the manegerial accountants Manegerial accountants arent there to primarily support the controllers, their primary focus should be to assist with managers they support and their decisions Cross functional group with various people working across the business as a part of one team Manegerial accountants today often have a more consultant or adviser role LO 4: Describe the role of the Institute of Management Accountants (IMA) and apply its ethical standards. What is the Institute of Management Accountants (IMA)? What is the American Institute of Certified Public Accountants (AICPA)? How could being a member help a person's career? Professional organizations IMA is for manegerial accountants AICPA is more for financial accountants and people who have the CPA designations These organizations provide services such as continuing education opportunities, teach data analytics, provide certification programs. IMA provides the CMA aka the certified management accountants. Great areas to help you network with other people who work in the same field as you as well as other job oppurtunities Often have student membership opportunities at cheap prices with the same benefits alongside Scholarships What are the four ethical standards in the IMA's Statement of Ethical Professional Practice? These organizations exist to set up basic ethical norms and standards for all members IMA: 1. Competence- able to do manegerial accounting work with basic levels of accounting knowledge and expertise 2. Confidentiality- keeping company information in private unless it is required to be disclosed or if people have responsibility for this information in their job. Not want to use confidential information for any illegal purposes 3. Integrity- avoid conflicts of interest, avoid activities that could prevent you from doing your job ethically 4. Credibility- communicate information fairly and accurately and disclose all relevant information **Work Problem A1-40** 1. Confidentiality breaches- gave password to her boyfriend which gave him the data 2. confidentiality 3. violated confidentiality and should have to report to her company about the leak of information. SEC should know about it to bring charges to the boyfriend on insider trading LO 5: Discuss the business trends and regulations affecting management accounting. What business trends are influencing managerial accounting today? How do these trends impact managerial accountants? 1. Big data or data analytics- trained in data management and tracking 2. Shifting economy- economy is driven more by service than manufacturing, companies are selling expertise and knowledge instead of products 3. Globalization- more and more companies around the world are competing with each other 4. Lean thinking or Six Sigma- lean thinking is have as little inventory as possible and only buy the amount as needed. Six sigma is trying to produce perfect quality products every time. 5. Sustainability- idea of whether we are being environmentally, socially and economically responsible 6. Integrated reporting- cutting edge way of reporting different information 7. Sarbanes Oxley Act of 2002- internal controls and financial reporting requirements **Discuss Accounting in the Headlines - Target ** What is cost-benefit analysis? Comparing anticipated cost to your anticipated benefits. We would have to go forward with decisions where the benefits are greater than the costs **Work Problem P1-27A** 635000 dollars is the Cost after adding them all up 610000 dollars is the total benefits Net cost of 25000 dollars Therefore they should not invest in the ERP system since the net costs exceed the benefits.

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How can using a single predetermined manufacturing overhead rate based on a unit-level cost driver (like direct labor hours) cause a high-volume product to be overcosted? High volume products would be allocated more overheads because more units are produced but they may not necessarily use more overheads. How can cost distortion be harmful to a company? Cost distortion is Inaccurate costing aka overcosting or undercosting. Overcosting can force you to set prices too high which would lead to lost sales. Undercosting can cause prices to be too low which could lead to unprofitability. Why might a company use a departmental overhead rate instead of a single plantwide rate? Departmental rates have a separate allocation rate for each department = More accurate allocations which means less Cost Distortion = Each department can pick its own allocation base Steps to Using Departmental Overhead Rates 1. Estimate total MOH cost for each department in the coming year 2. Select an allocation base for each department and estimate the amount that will be used during the year 3. Calculate departmental overhead rate 4. Allocate MOH from each department to the individual jobs in those departments **Work S4-3** 1. Single plantwide allocation rate= 3 311 500/ 17900 = $185 per machine hour 2. Potato chips= $180 per hour (overcosted) Corn chips= $218 per hour (undercosted) Cheese puff= $165 per hour (overcosted) LO 2: Develop and use activity-based costing (ABC) to allocate indirect costs. How is activity-based costing different from using departmental overhead allocation rates? Allocated based on activities and there can be multiple activities within one department. This will be even more accurate as we are using even more information Steps to Using Activity-Based Cost Allocation Rates 1. Identify primary activities and estimate total MOH cost for each activity (also called activity cost pools) 2. Select an allocation base for each activity and estimate the total amount that will be used during the year 3. Calculate activity cost allocation rates 4. Allocate MOH from each activity to individual jobs that use the activities Cost Hierarchy for Activity Cost Pools Unit Level Activity- We would base our manufacturing OH costs based on units produced, inspections, packaging Batch Level Activity- Costs that occur for a group of similar products produced: machine setups Product Level Activity- Occur for a particular product regardless of how many units or batches are produced: Rent on machines used on a specific product Facilities Level Activity- Plantwide costs that relate to the overall factory: Electricity, property taxes, plant depreciation **Discuss Accounting in the Headlines - Virgin Airlines** **Work E4-24A and Paper Clip Activity** 1. Machine Setup- $60 per hour Machining- $175 per hour Polishing- $8 per hour Quality control- $70 per hour Facility legal costs= $240 per hour 2. Total cost= $2415 = DL + DM + MOH of Indirect costs = 1050 + 10 x 25 + 1115 4. Traditional= Plantwide rate Plantwide Rate = 1 650 000/ 50000 = $33 per labor hour Indirect costs= 33 x 10 = $330 (undercosted) LO 3: Understand the benefits and limitations of ABC/ABM systems. What is activity-based management? Using ABC information to make business decisions. Intent is to increase profits while satisfying customer needs Example of decisions: Setting prices, cutting costs, making budgets A hospital can use ABC for costing its services. In a hospital, what activities might be considered value-added? Which activities might be considered non-value-added? Which of these costs would the hospital want to try to reduce? Must look at all of it from the customers standpoint Value Added- Activities that add value for the customer. Being clean and sanitary. Reminders of appointments. Treatment. Non-Value Added- Activities that don't add any values for customers. Waiting time. Poor customer service. Fixed asset maintenance. We would attempt to cut down on the Non-Value added activities. We wouldn't touch value added activities as it is something customers would pay for. When would a company want to use ABC and ABM instead of a single-plantwide or departmental allocation rates? If the benefits of ABC/ABM outweigh the costs. In situations with more competition (need to set prices accurately or lower costs), produce many different products (risk of cost distortion), has high indirect (mfg OH) costs, high volumes of some products and low volumes of other products. **Work S4-11** a. cost of reworking defective units- Non-value-added b. cost of moving raw materials around in production- Non-value-added c. costs arising from backlog in production- Non-value-added d. salary for supervisor on the factory floor- Non-value-added e. wages of the workers assembling products- Value-added f. cost of warehousing raw materials- Non-value added g. engineering design costs for new product- Value-added h. product inspection- Non-value-added LO 4: Describe lean operations. Define "lean thinking." Trying to create value for customers by eliminating waste. Reduce customer wait time, quality issues, REDUCE INVENTORY aka Just In Time inventory management. Describe what a traditional production system and a lean production system would each look like. Lean System- lower inventory produce in a Just In Time manner manufacturing cells multi-skilled employees Traditional System- lots of raw materials and finished goods on hand produce stockpiles based on expected customer demand production line instead employees specialized in one or two tasks What are the potential drawbacks of a traditional production system? Storage costs Potential waste of products or obsolete More workers to fund Cash tied up in inventory instead of upgrading the business What are the drawbacks of a lean production system? No backup inventory to meet demand Have to pay employees much higher wages for their skills What is backflush costing? All manufacturing costs are immediately charged to cost of goods sold Costs of Work in Process inventory or Finished goods are backed out at the end of the period **Work S4-13** a. Not utilizing employees to their full potential b. Excess Processing c. Movement d. Waiting LO 5: Describe and use the costs of quality framework. Lean companies often follow a philosophy called total quality management. What is this and why is it so important for lean companies? We want to continually improve product quality. *Very important as they don't have much inventory in hand. What are the four categories of quality-related costs. Conformance costs: 1.Prevention Costs- Costs to avoid poor quality products; Picking high quality suppliers. Inspections of materials 2.Appraisal Costs- Costs of detecting poor quality products before they reach customers; Inspections of Products in process or finished goods Non-Conformance costs: 1.Internal Failure Costs- Failure discovered internally; Rework costs, 2.External Failure Costs- Customer identifies the failure; Warranty costs, Lost Sales