AFM 102 FINAL EXAM REVIEW
how to trace Direct Labour Costs
Direct labour costs are traced in a very similar way as direct materials, using systems to track the number of direct labour hours worked by job. Direct labour is charged to a job using a time ticket, which is a detailed source document that is used to record an employee's hour-by-hour activities during a day.
how to trace direct material costs
Direct materials are not difficult to trace to jobs as companies leverage systems to track the direct material cost that each job utilizes. Material requisition form(s) are utilized for tracing direct costs. A material requisition form is a document that specifies the type and quantity of materials that are to be drawn from the storeroom. It also identifies which job the costs of materials should be charged to.
Managerial accountants are responsible for the following areas:
Financial Planning—budgeting, forecasting, and strategic/long-term planning Performance Management—ensuring actual performance meets budgeted targets Decision Support—providing analysis necessary to assist management decision-making
what is traced to jobs vs what is allocated jobs
In job-order costing, direct materials and direct labour costs are charged to each job as work is performed. Manufacturing overhead costs are difficult to trace and therefore are allocated to all jobs rather than directly traced.
Within the relevant range of activity, how will variable cost per unit behave?
It will remain constant.
We will be following these decision rules:
Make change if: it will cause an increase in operating income Do not make change if: it will cause a decrease in operating income
Margin of safety:
The excess of budgeted (or actual) sales over the break-even volume of sales.
break-even point (BEP)
The level of sales at which profit is zero. Can also be defined as the point where total sales equals total expenses, or as the point where total contribution margin equals fixed expenses.
Cost-volume-profit (CVP) graph:
The relationship among revenues, costs, and level of activity presented in
Cost structure
The relative proportion of fixed, variable, and mixed costs found in an organization
Sales mix:
The relative proportions in which a company's products are sold. The sales mix is computed by expressing the sales of each product as a percentage of total sales.
gross margin percentage
To determine manufacturing efficiency, companies calculate gross margin percentage, which is derived as follows: Gross margin / Total revenue
Total mixed cost formula
Total fixed cost + Total variable cost
Product vs. period costs
Total operating costs == Product costs ++ Period costs Prepare gross margin income statement for internal and external reporting purposes
Direct vs. indirect costs
Total operating costs == Variable costs ++ Fixed costs Prepare contribution margin income statements for internal reporting purposes
Variable vs. fixed costs
Total operating costs == Variable costs ++ Fixed costs Prepare contribution margin income statements for internal reporting purposes
Contribution Margin income statement
Total revenue - Variable costs = Contribution margin - Fixed costs = Operating income
gross margin income statement
Total revenue − Product costs =Gross margin − Period costs =Operating income
Why is monthly performance management important? Click to reveal/hide answer
Understanding how the company is performing compared to budget is an important monthly analysis to understand what the company is doing well and what decisions need to be made to improve performance in future months to meet targets. Monthly performance management provides finance and operational leaders an understanding of business performance and challenges them to figure out the root causes that are driving under- or over-performance.
Top management
consists of the Chief Executive Officer (CEO), who is the most senior corporate executive leading a company; the Chief Financial Officer (CFO), who leads Finance and Accounting; and the Chief Operating Officer (COO), who leads business operations and execution of a company's budgeted plan. In many companies, there are other Chief Executive positions depending on the company's strategy and structure.
CM ratio (or percentage) formula:
contribution margin/ sales
Variable costs
costs that vary, in total, in direct proportion to changes in level of activity For example, if variable costs to produce 50 units are $500, then variable costs to produce 100 units are $1,000. The variable cost per unit is $10 in both circumstances.
using direct material t- accounts
credit raw materials debit work in process inventory
using indirect materials t- accounts
credit raw materials inventory debit manufacturing overheads
usage of direct and indirect labour: t-accounts
credit salries payable debit job A work in process inventory debit manufacturing overhead
Operating decisions
day-to-day decisions that maximize profitability by increasing revenue and decreasing costs.
recording sold goods
debit cogs credit finished goods inventory
recording finished goods
debit finished goods inventory credit work in process inventory
recording other manufacturing overhead
debit manufacturing overhead credit payables
allocating manufacturing overhead
debit wok in process inventory debit work in process inventory credit manufacturing overhead
Degree of operating leverage formula:
degree of operating leverage= contribution margin / operating income
total manufacutring costs formula
direct materials + direct labour+ manufacturing overhead
underapplied
erhead allocated to jobs is less than the amount of overhead cost actually incurred during a period.
Predetermined overhead rate formula:
estinmated total manufacturing overhead cost/ estimated total units in the allocation base
Direct labour
factory labour costs that can be traced easily to individual products Direct labour includes wages of all front-line workers that operate equipment and assemble the cars.
Financial accountants
for producing quarterly and yearly financial summary reports for external users such as banks, tax authorities, regulators, shareholders/investors, and bondholders. The main role of financial accountants is to prepare financial statements that external users can use to understand the company's past performance compared to a prior period.
what happens when raw materials purchases
goes into raw materials inventory -direct materials used in production work in process inventory - add when direct labour - add manufacturing overhead - add raw materials goods completed - transferred to finished goods inventory
operating costs
interest and income tax costs
relevant range
is the range of activity within which assumptions about variable and fixed cost behaviour are valid.
Margin of safety percentage formula:
margin of safety / total budgeted (actual) sales
Direct materials
materials that become an integral part of a finished product and can be conveniently traced to it For a company that produces cars, direct materials would include all car parts purchased such as the engine, wheels, and windows.
Period costs are
non-manufacturing costs such as marketing, selling, and administrative costs that are expensed directly in the company's income statement when they are incurred (i.e., they are never recorded in the balance sheet).
Operating profit graph formula:
operating profit = unit CM x Q - fixed expenses
overapplied
or in other words, overhead allocated to jobs is greater than the amount of overhead cost actually incurred during a period.
Overhead applied to a particular job formula:
overhead applied to a job = POHR x amount of allocation base incurred by job
How often are budgets prepared
prepared once every year before the fiscal year begins and remain static, or in other words do not change. An important part of financial planning is identifying risks and opportunities within a company's plan. For all major risks identified, companies need to think through an action or mitigation plan that the company would put in place to minimize negative financial impacts if the risk occurs. We will be discussing risks and opportunities in more detail when we learn about the budgeting process.
what happens when finished good inventory is sold
product costs= COGs and period costs- selling and administrative expenses are expensed
what are the 3 accounts on the balance sheet
raw materials inventory work in process inventory finished goods inventory
Governance structure
refers to the way a company organizes itself to make and execute decisions. In a public company, the shareholders elect the board of directors, who then select top management.
Capital budgeting decisions
relate to making cash investments to continue to grow the company in the future.
Performance management involves
s producing reports that assist management to understand monthly company performance compared to budget. Managerial accountants lead this process by producing reports that compare monthly actual financial results with budgeted targets. When companies are performing below budgeted targets, managerial accountants need to understand the underlying root causes and assist management teams to make decisions to improve performance. On the flip side, when companies are performing better than budgeted targets, managerial accountants analyze the results to ensure favourable performance continues in the future.
segmented profitability
such as profitability by product, customer, or geography. For example, if a manufacturing company has two customers, managerial accountants can create income statements by customer: Customer 1 operating income Customer 2 operating income
product costs are recorded on balance sheet inventory accounts until
they are sold. When the products are sold, the product costs move out of the balance sheet and are recorded as cost of goods sold, an expense account, on the company's income statement.
Indirect material and indirect labour costs include t
those costs that cannot be easily traced to producing a car. Examples of indirect materials are costs of glue and nails. Indirect labour would include labour costs of janitors and plant supervisors.
Margin of safety formula:
total budgeted / sales - break even sales
At time of sale, product costs are
transferred out of the inventory accounts on the balance sheet and recognized as cost of goods sold in the income statement.
Units sold to achieve a target operating profit formula
(fixed expenses + target operating profits) /unit CM
Job-Order Cost Schedule Preparation
- manufacturing overhead : manufacturing overhead allocated Schedule of Cost of Goods Sold ~ Unadjusted cost of goods sold: - ADD UNDERAPPLIED OVERHEAD - DEDUCTE OVERAPPLIED OVERHEAD
Step-variable cost
A cost that is obtainable only in large amounts and that increases and decreases only in response to fairly wide changes in the level of activity. A simple example of a step-variable cost is the cost of camp counsellors in a summer camp. A summer camp might have a certain ratio requirement of number of campers that one counsellor can safely supervise. For example, a ratio could be 10:1, which means that for every 10 campers there must be 1 counsellor present.
Absorption costing
A costing method that includes all manufacturing costs—direct materials, direct labour, and both variable and fixed overhead—as part of the cost of a finished unit of product
Job-order costing system
A costing system used in situations where many different products, jobs, or services are produced each period
Overapplied overhead
A credit balance in the Manufacturing Overhead account that arises when the amount of overhead cost applied to Work in Process during the period is greater than the amount of overhead cost actually incurred during a period
Underapplied overhead
A debit balance in the Manufacturing Overhead account that arises when the amount of overhead cost applied to Work in Process during the period is less than the amount of overhead cost actually incurred during a period
What will result from an increase in the activity level within the relevant range?
A decrease in the fixed cost per unit.
Time ticket
A detailed source document that is used to record an employee's hour-by-hour activities during a day
Materials requisition form
A detailed source document that specifies the type and quantity of materials that are to be drawn from the storeroom and identifies the job to which the costs of materials are to be charged
Cost driver
A factor that causes overhead costs, such as machine-hours, beds occupied, computer time, or flight hours
Job cost sheet
A form prepared for each job that records the materials, labour, and overhead costs charged to the job
Allocation base
A measure of activity, such as direct labour-hours or machine-hours, that is used to assign costs to cost objects
Operating leverage:
A measure of how sensitive operating income is to a given percentage change in sales.
Activity base
A measure of whatever causes a variable cost to be incurred i.e. Number of bikes produced
High-low method:
A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low levels of activity (
Predetermined overhead rate (POHR)
A rate used to charge overhead costs to jobs; the rate is established in advance for each period using estimates of total manufacturing overhead costs and of the total allocation base of the period
Bill of materials
A record that lists the type and quantity of each major item of the materials required to make a product
Incremental analysis:
An analytic approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision.
Full costing
Another name for absorption costing
Manufacturing Company cogs
Beginning finished goods inventory + Cost of goods manufactured =Goods available for sale -Ending finshed goods inventory =Cost of goods sold
Effect of a change in sales on the CM formula:
CM ratio x change in sales
When do companies build forecasts
Companies build forecasts if there are significant events that occur during the year that change the budget in a meaningful way.
Committed fixed costs:
Costs that are difficult to change in the short term and that relate to the investment in facilities, equipment, and the basic organizational structure of a firm
Discretionary fixed costs
Costs that arise from annual decisions by management to spend in certain areas such as advertising, events, and research
Fixed costs level of activity
Costs that remain constant, in total, regardless of changes in the level of activity
Contribution margin (CM) ratio:
The contribution margin as a percentage of total sales.
COGS formula
beginning wip inventory + total manufacturing costs- ending work in process inventory
Break-even point in total sales dollars formula:
break even point in total sales dollars fixed expenses/ CM ratio
Break-even point in units sold formula:
break even poitn in units points fixed expenses / unit contribution margin
measure period costs as a percentage of total revenue
Period costs / Total revenue
Cost-volume-profit (CVP) analysis is a tool that helps managerial accountants make decisions relating to the following five elements:
Prices of products—what price should we charge our customers? Volume or level of activity—how many units do we need to sell to make a profit? Per unit variable costs—how can we control the cost to make one unit to maximize profit? Total fixed costs—how can we control fixed costs to maximize profit? Mix of products sold for multi-product companies—which products should we sell?
Which of the following is an example of a committed fixed cost?
Property taxes on the factory building
Contribution margin definition
The amount remaining from sales revenues after variable expenses have been deducted
Mixed cost formula
Y=a+bX where a is the total fixed cost, bb is the variable cost per unit, X is the number of units and Y is the mixed cost. Or, Total mixed cost = Total fixed cost + Total variable cost
board of directors
a group of individuals that have the highest authority within a company. They approve strategic decision-making, approve strategic and financial plans, act as advisors, and protect shareholders' interests. They ensure top management is leading the company to achieve growth and improvement and making decisions that will benefit the company's shareholders or investors.
Product costs include
all costs involved in the purchase or manufacture of products. For manufactured products, these costs include direct materials, direct labour, and manufacturing overhead.
Financial planning involves working with
all functional areas within an organization to build an estimate of a company's future financial performance, referred to as a budget.
Manufacturing overhead
all indirect costs associated with the manufacturing process including indirect materials and indirect labour Manufacturing overhead costs include indirect material costs, indirect labour costs, and other indirect costs such as heat, light, property taxes, and insurance of the manufacturing plant.
Mixed costs
are those that contain both variable and fixed cost elements. For example, the cost of driving a car is a mixed cost. The cost of fuel is a variable component that fluctuates depending on the number of kilometers driven. Insurance and parking are examples of fixed costs that do not change regardless of the number of kilometers driven. We will be learning more about mixed costs later in this course.
Fixed costs
are those that remain constant, in total, regardless of changes in the level of activity. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity.
Managerial accountants also calculate contribution margin
as a percentage of total revenue as a key measure of cost efficiency, and companies strive to maximize this measure to increase profitability. The contribution margin format is also helpful when making business decisions such as determining pricing, rejecting or accepting special orders, and whether to make or buy. We will be learning more about the analysis required to make these kinds of decisions later in this course.
Merchandising Company cogs
beginning merchandise inventory +cogs manufactured is purchases = goods avaliable for sale - ending merchandise inventory = cogs
steps for cogs manufactured
beginning raw material inventory + beginning materials purchased = raw materials used in production (DIRECT MATERIALS) +direct labour + manufacturing overhead = total manufacturing costs - beginning work in process inventory + total manufacturing costs (total manufacturing costs) = total work in process for the period - ending work in process inventory = cost of goods manufactured of the goods that were finished
