WGU UFC1 Wild Managerial Accounting

Describe the importance of relevant costs for short-term decisions.

A company must rely on relevant costs pertaining to alternative courses of action rather than historical costs. Out-of-pocket expenses and opportunity costs are relevant because these are avoidable; sunk costs are irrelevant because they result from past decisions and are therefore unavoidable. Managers must also consider the relevant benefits associated with alternative decisions.

Compute the break-even point for a single product company.

A company's break-even point for a period is the sales volume at which total revenues equal total costs. To compute a break-even point in terms of sales units, we divide total fixed costs by the contribution margin per unit. To compute a break-even point in terms of sales dollars, divide total fixed costs by the contribution margin ratio.

Explain controllable costs and responsibility accounting.

A controllable cost is one that is influenced by a specific management level. The total expenses of operating a department often include some items a department manager does not control. Responsibility accounting systems provide information for evaluating the performance of department managers. A responsibility accounting system's performance reports for evaluating department managers should include only the expenses (and revenues) that each manager controls.

Contribution margin per unit = Sales price - Variable cost per unit

A critical part of this formula equals contribution margin — remember that sales price less variable cost per unit equals contribution margin per unit.

Analyze investment centers using return on assets, residual income, and balanced scorecard.

A financial measure often used to evaluate an investment center manager is the investment center return on total assets, also called return on investment. This measure is computed as the center's net income divided by the center's average total assets. Residual income, computed as investment center net income minus a target net income is an alternative financial measure of investment center performance. A balanced scorecard uses a combination of financial and non-financial measures to evaluate performance.

Summarize and report results of analysis.

A financial statement analysis report is often organized around the building blocks of analysis. A good report separates interpretations and conclusions of analysis from the information underlying them. An analysis report often consists of six sections: (1) executive summary, (2) analysis overview, (3) evidential matter, (4) assumptions, (5) key factors, and (6) inferences.

Prepare a flexible budget and interpret a flexible budget performance report.

A flexible budget expresses variable costs in per unit terms so that it can be used to develop budgeted amounts for any volume level within the relevant range. Thus, managers compute budgeted amounts for evaluation after a period for the volume that actually occurred. To prepare a flexible budget, we express each variable cost as a constant amount per unit of sales (or as a percent of sales dollars). In contrast, the budgeted amount of each fixed cost is expressed as a total amount expected to occur at any sales volume within the relevant range. The flexible budget is then determined using these computations and amounts for fixed and variable costs at the expected sales volume.

Explain and illustrate a hybrid costing system.

A hybrid costing system contains features of both job order and process costing systems. Generally, certain direct materials are accounted for by individual products as in job order costing, but direct labor and overhead costs are accounted for similar to process costing.

Describe allocation of joint costs across products.

A joint cost refers to costs incurred to produce or purchase two or more products at the same time. When income statements are prepared, joint costs are usually allocated to the resulting joint products using either a physical or value basis.

Compute cost of goods sold for a manufacturer.

A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold.

Prepare production and manufacturing budgets.

A manufacturer must prepare a production budget instead of a purchases budget. A manufacturing budget shows the budgeted production costs for direct materials, direct labor, and overhead.

Describe a master budget and the process of preparing it.

A master budget is a formal overall plan for a company. It consists of plans for business operations and capital expenditures, plus the financial results of those activities. The budgeting process begins with a sales budget. Based on expected sales volume, companies can budget purchases, selling expenses, and administrative expenses. Next, the capital expenditures budget is prepared, followed by the cash budget and budgeted financial statements. Manufacturers also must budget production quantities, materials purchases, labor costs, and overhead.

Define and prepare a process cost summary and describe its purposes.

A process cost summary reports on the activities of a production process or department for a period. It describes the costs charged to the department, the equivalent units of production for the department, and the costs assigned to the output. The report aims to (1) help managers control their departments, (2) help factory managers evaluate department managers' performances, and (3) provide cost information for financial statements. A process cost summary includes the physical flow of units, equivalent units of production, costs per equivalent unit, and a cost reconciliation. It reports the units and costs to account for during the period and how they were accounted for during the period. In terms of units, the summary includes the beginning goods in process inventory and the units started during the month. These units are accounted for in terms of the goods completed and transferred out, and the ending goods in process inventory. With respect to costs, the summary includes materials, labor, and overhead costs assigned to the process during the period. It shows how these costs are assigned to goods completed and transferred out, and to ending goods in process inventory.

Compute accounting rate of return and explain its use.

A project's accounting rate of return is computed by dividing the expected annual after-tax net income by the average amount of investment in the project. When the net cash flows are received evenly throughout each period and straight-line depreciation is used, the average investment is computed as the average of the investment's initial book value and its salvage value.

Identify and assess advantages and disadvantages of the plant-wide overhead and departmental overhead rate methods.

A single plant-wide overhead rate is a simple way to assign overhead cost. A disadvantage is that it can inaccurately assign costs when costs are caused by multiple factors and when different products consume different amounts of inputs. Overhead costing accuracy is improved by use of multiple departmental rates because differences across departmental functions can be linked to costs incurred in departments. Yet, accuracy of cost assignment with departmental rates suffers from the same problems associated with plant-wide rates because activities required for each product are not identified with costs of providing those activities.

Illustrate use of a spreadsheet to prepare a statement of cash flows.

A spreadsheet is a useful tool in preparing a statement of cash flows. Six key steps are applied when using the spreadsheet to prepare the statement.

Variance:

A variance is a difference between your planned or budgeted cost and your actual results. A favorable variance occurs when your actual costs are less than your budgeted or planned cost. An unfavorable variance is when actual costs are higher than planned.

The following data (in thousands of dollars) have been taken from the accounting records of Casey Corporation for the just completed year. Administrative expense $ 30 Direct labor 40 Finished goods inventory, beginning 24 Finished goods inventory, ending 32 Manufacturing overhead 46 Purchases of raw material 24 Raw materials inventory, beginning 8 Raw materials inventory, ending 14 Sale 1,98 Selling expense 28 Work in process inventory, beginning 14 Work in process inventory, ending 10 The cost of goods sold for the year (in thousands of dollars) was: A) $1,000. B) $1,160. C) $1,320. D) $1,400.

A) $1,000. Finished goods inventory, beginning $ 24 Cost of goods manufactured 1,08 Less finished goods inventory, ending (320) Cost of goods sold $1,00

Venezia Company employs a standard cost system in which direct materials inventory is carried at standard cost. Venezia has established the following standards for the prime costs of one unit of product: Standard Quantity|Standard Price|Standard Cost Direct materials 6.0lbs $ 7.00/pound $42.00 Direct labor 1.3 hours $22.00/hour 28.60 $70.60 During June, Venezia purchased 165,000 pounds of direct material at a total cost of $1,171,500. The total factory wages for June were $800,000, 90 percent of which were for direct labor. Venezia manufactured 25,000 units of product during June using 151,000 pounds of direct material and 32,000 direct labor hours. (Note that this is the same data that was provided for the previous question.) The direct labor efficiency variance for June is: A) $11,000 favorable. B) $11,000 unfavorable. C) $11,250 favorable. D) $11,250 unfavorable.

A) $11,000 favorable. First, calculate the standard hours as follows: 25,000 units x 1.3 hours per unit = 32,500 hours Then calculate the direct labor efficiency variance as follows: Direct labor efficiency variance = Standard rate x (Actual hours - Standard hours) Direct labor efficiency variance = SR x (AH - SH) Direct labor efficiency variance = $22.00 x (32,000 - 32,500) = $11,000 Favorable (F)

The following data (in thousands of dollars) have been taken from the accounting records of Casey Corporation for the just completed year. Administrative expense $ 30 Direct labor 40 Finished goods inventory, beginning 24 Finished goods inventory, ending 32 Manufacturing overhead 46 Purchases of raw material 24 Raw materials inventory, beginning 8 Raw materials inventory, ending 14 Sale 1,98 Selling expense 28 Work in process inventory, beginning 14 Work in process inventory, ending 10 The cost of the raw materials used in production during the year (in thousands of dollars) was: A) $180. B) $300. C) $320. D) $380.

A) $180. Raw materials inventory, beginning $ 8 Purchases of raw material 24 Less raw materials inventory, ending (140) Raw materials used in production $180

Carrington Company produces a product that sells for $60. Variable manufacturing costs are $30 per unit. Fixed manufacturing costs are $10 per unit based on the current level of activity, and fixed selling and administrative costs are $8 per unit. A selling commission of 10% of the selling price is paid on each unit sold. The contribution margin per unit is: A) $24. B) $30. C) $36. D) $54.

A) $24. Sales price $60 Variable manufacturing costs $30 Selling costs ($60 x 10%) 6 36 Contribution margin $24

Chapman Company sells its product for $42 per unit. The company's unit product cost based on the full capacity of 400,000 units is as follows: Direct materials $ 8 Direct labor 10 Manufacturing overhead 12 Unit product cost $30 A special order offering to buy 40,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $6 per unit for shipping. The company has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, the minimum acceptable selling price per unit should be: A) $28. B) $30. C) $32. D) $36.

A) $28.

The following are the Goodman Company's unit costs of making and selling an item at a volume of 20,000 units per month (which represents the company's capacity): Manufacturing: Direct materials $2.00 Direct labor 4.00 Variable overhead 1.00 Fixed overhead 1.80 Selling and administrative: Variable 3.00 Fixed 1.20 Assume the company has 100 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. What cost is relevant as a guide for setting a minimum price on these defective units? A) $3.00 B) $7.00 C) $10.00 D) $13.00

A) $3.00

Hoyt Company has the following estimated costs for next year: Direct materials $30,000 Direct labor 110,000 Sales commissions 150,000 Salary of production supervisor 70,000 Indirect materials 10,000 Advertising expense 22,000 Rent on factory equipment 32,000 Hoyt estimates that 20,000 direct labor and 32,000 machine hours will be worked during the year. If overhead is applied on the basis of machine hours, the overhead rate per hour will be: A) $3.50. B) $6.94. C) $7.63. D) $8.56.

A) $3.50. Salary of production supervisor $ 70,000 Indirect materials 10,000 Rent on factory equipment 32,000 Estimated manufacturing overhead costs 112,000 Estimated machine hours 32,000 Predetermined overhead rate $3.50 per MH

The Western Division of Vollick Enterprises recorded operating data as follows for the past year. Sales $400,000 Net operating income 50,000 Average operating assets 200,000 Stockholders' equity 160,000 Residual income 26,000 For the past year, the margin was: A) 12.50%. B) 13.00%. C) 14.75%. D) 15.00%.

A) 12.50%.

Leonardo Company plans to sell 24,000 units during the month of August. If the company has 5,000 units on hand at the start of the month, and plans to have 4,000 units on hand at the end of the month, how many units must be produced during the month? A) 23,000. B) 24,000. C) 25,000. D) 28,000.

A) 23,000. Sales 24,000 Plus planned ending inventory 4,000 Less beginning inventory (5,000) Units to be produced 23,000

The following is Montague Corporation's contribution format income statement for last month: Sales $2,000,000 Less variable expenses 1,400,000 Contribution margin 600,000 Less fixed expenses 360,000 Net income $ 240,000 The company has no beginning or ending inventories. A total of 40,000 units were produced and sold last month. What is the company's contribution margin ratio? A) 30% B) 70% C) 150% D) 250%

A) 30% Feedback: Contribution margin (CM) ÷ Sales = CM ratio $600,000 ÷ $2,000,000 = .30 or 30%

The following is Montague Corporation's contribution format income statement for last month: Sales $2,000,000 Less variable expenses 1,400,000 Contribution margin 600,000 Less fixed expenses 360,000 Net income $ 240,000 The company has no beginning or ending inventories. A total of 40,000 units were produced and sold last month. How many units would the company have to sell to attain target profits of $300,000? A) 44,000 B) 50,000 C) 53,334 D) 75,000

A) 44,000

Serit Company's predetermined overhead rate is based on direct labor hours. At the beginning of the current year, the company estimated that its manufacturing overhead would total $220,000 during the year. During the year, the company incurred $200,000 in actual manufacturing overhead costs. The Manufacturing Overhead account showed that overhead was overapplied by $8,000 during the year. If the predetermined overhead rate was $20.00 per direct labor hour, how many hours were worked during the year? A) 9,600 hours B) 10,000 hours C) 10,400 hours D) 11,000 hours

A) 9,600 hours First, determine the amount of overhead applied to production by reference to the information about the Manufacturing Overhead account: Actual overhead - Amount applied to production = Amount over- (under)applied $200,000 - Amount applied to production = $8,000 Amount assigned to production = $192,000 Then, solve for the direct labor hours here (the activity base for the overhead rate): Predetermined overhead rate x Direct labor hours = Manufacturing overhead applied $20.00/direct labor hour x Actual direct labor hours = $192,000 (from above) Actual direct labor hours = 9,600

The performance of the manager of Division A is measured by residual income. Which of the following would increase the manager's performance measure? A) A decrease in the division's average operating assets. B) A decrease in the division's net operating income. C) An increase in the division's average operating assets. D) An increase in the minimum required return.

A) A decrease in the division's average operating assets.

The net present value method takes into account: Cash Flow Over Time Value Life of Project of Money A) Yes Yes B) Yes No C) No Yes D) No No

A) Answer A

Which of the following statements is (are) true? A) Companies that product many different products or services are more likely to use job-order costing systems than process costing systems. B) Job-order costing systems are used by service firms and process costing systems are used by manufacturers. C) Costs are traced to departments and then allocated to units of product when job-order costing is used. D) All of the above.

A) Companies that product many different products or services are more likely to use job-order costing systems than process costing systems.

Parker Company is considering the following investment proposals: Investment Proposal A B C D Investment required $80,000 $100,000 $60,000 $75,000 Present value of future net cash flows 96,000 150,000 84,000 120,000 How should management rank the proposals in terms of preference using the profitability index? A) D, B, C, A. B) B, D, C, A. C) B, D, A, C. D) A, C, B, D.

A) D, B, C, A.

All of the following are examples of product-level activities except: A) Human resource management. B) Advertising a product. C) Testing a prototype of a new product. D) Parts administration.

A) Human resource management.

The preference rule for ranking projects by the profitability index is: A) The higher the profitability index, the more desirable the project. B) The lower the profitability index, the more desirable the project. C) The higher the sunk cost, the more desirable the project. D) The lower the sunk cost, the more desirable the project.

A) The higher the profitability index, the more desirable the project.

Which of the following statements are true? A) The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates. B) Projects with shorter payback periods are always more profitable than projects with longer payback periods. C) The payback method of making capital budgeting decisions gives full consideration to the time value of money. D) If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

A) The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates.

In a job order cost system, the use of direct materials would be recorded as a debit to: A) Work in Process inventory. B) Finished Goods inventory. C) Manufacturing Overhead. D) Raw Materials inventory.

A) Work in Process inventory.

When using the indirect method to prepare the statement of cash flows, Depreciation Expense should be presented as a(n): A) addition to net income. B) cash flow from financing activities. C) cash flow from investing activities. D) deduction from net income. E) investing and financing activity not affecting cash.

A) addition to net income.

An increase in the Accounts Payable account of a company from $1,000 at the beginning of the year, to $3,000 at the end of the year, would be shown on the company's statement of cash flows prepared under the indirect method as: A) an addition to net income of $2,000 in order to arrive at cash flows from operating activities. B) a cash flow of $2,000 under the investing Activities heading. C) a cash flow of $2,000 under the financing Activities heading. D) a deduction from net income of $2,000 in order to arrive at cash flows from operating activities.

A) an addition to net income of $2,000 in order to arrive at cash flows from operating activities.

Costs that are always relevant in decision-making are: A) avoidable costs. B) fixed costs. C) sunk costs. D) variable costs.

A) avoidable costs.

The market price of the common stock of Magnolia Company dropped from $50 to $42 per share. The dividend paid per share remained unchanged. The company's dividend payout ratio would: A) be unchanged. B) increase. C) decrease. D) be impossible to determine without more information.

A) be unchanged.

The managers of a firm are in the process of deciding whether to accept or reject a special offer for one of its products. A cost that is not relevant is their decision is the: A) common fixed overhead that will continue if the special offer is not accepted. B) direct materials. C) fixed overhead that will be avoided if the special offer is accepted. D) variable overhead

A) common fixed overhead that will continue if the special offer is not accepted.

A study has been conducted to determine if one of the departments of Lucy Company should be discontinued. The contribution margin in the department is $100,000 per year. Fixed expenses charged to the department are $130,000 per year. It is estimated that $80,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, Lucy's overall net operating income would: A) decrease by $20,000 per year. B) increase by $20,000 per year. C) decrease by $50,000 per year. D) increase by $50,000 per year.

A) decrease by $20,000 per year.

An increase in denominator level of activity will: A) decrease the fixed portion of the predetermined overhead rate. B) increase the fixed portion of the predetermined overhead rate. C) decrease the variable portion of the predetermined overhead rate. D) increase the variable portion of the predetermined overhead rate.

A) decrease the fixed portion of the predetermined overhead rate.

The Empire Corporation has 2,000 obsolete units of a product that are carried in inventory at a manufacturing cost of $40,000. If the units are remachined for $10,000, they could be sold for $18,000. Alternatively, the units could be sold for scrap for $2,000. Which alternative is more desirable and what are the total relevant costs for that alternative? A) remachine; $10,000. B) remachine; $50,000. C) scrap; $40,000. D) scrap; $40,000.

A) remachine; $10,000.

Montpellier Company reported a favorable materials price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, you can conclude that: A) the actual cost per pound for materials was less than the standard cost per pound. B) the actual usage of materials was less than the standard allowed. C) more materials were purchased than were used. D) more materials were used than were purchased.

A) the actual cost per pound for materials was less than the standard cost per pound.

Activity-based costing (ABC):

ABC costing can be used for both job costing and process costing analysis. You use ABC costing to assign costs to your product more specifically. ABC costing analyzes the activities that cause you to incur costs; you then connect the cost to the activity.

Identify and assess advantages and disadvantages of activity-based costing.

ABC improves product costing accuracy and draws management attention to relevant factors to control. The cost of constructing and maintaining an ABC system can sometimes outweigh its value.

Compute unit cost under both absorption and variable costing.

Absorption cost per unit includes direct materials, direct labor, and all overhead, whereas variable cost per unit includes direct materials, direct labor, and only variable overhead.

Absorption cost: Cost that includes fixed and variable product costs

Absorption cost: Cost that includes fixed and variable product costs

Analyze expense planning using activity-based budgeting.

Activity-based budgeting requires management to identify activities performed by departments, plan necessary activity levels, identify resources required to perform these activities, and budget the resources.

Analyze changes in sales from expected amounts.

Actual sales can differ from budgeted sales, and managers can investigate this difference by computing both the sales price and sales volume variances. The sales price variance refers to that portion of total variance resulting from a difference between actual and budgeted selling prices. The sales volume variance refers to that portion of total variance resulting from a difference between actual and budgeted sales quantities.

Explain the form and assess the content of a complete income statement.

An income statement has four potential sections: (1) continuing operations, (2) discontinued segments, (3) extraordinary items, and (4) earnings per share.

Compute net present value and describe its use.

An investment's net present value is determined by predicting the future cash flows it is expected to generate, discounting them at a rate that represents an acceptable return, and then by subtracting the investment's initial cost from the sum of the present values. This technique can deal with any pattern of expected cash flows and applies a superior concept of return on investment.

Record the transfer of completed goods to Finished Goods Inventory and Cost of Goods Sold.

As units complete the final process and are eventually sold, their accumulated cost is transferred to Finished Goods Inventory and finally to Cost of Goods Sold.

Assets = Liability + Owners' Equity

Assets are things owned by the company — such as cash, inventory, and equipment — that will provide some future benefit. Liabilities entail future sacrifices that the company must make, such as paying bills or other kinds of debts. Owners' equity represents the portion of the company that actually belongs to the owner. A basic rule of accounting is that the accounting equation must always balance. If assets exceed the sum of liabilities and owners' equity, then the company holds things that don't belong to anyone. If the sum of liabilities and owners' equity exceeds assets, then owners and creditors lay claim to things that don't exist.

Determine adjustments for overapplied and underapplied factory overhead.

At the end of each period, the Factory Overhead account usually has a residual debit (underapplied overhead) or credit (overapplied overhead) balance. If the balance is not material, it is transferred to Cost of Goods Sold, but if it is material, it is allocated to Goods in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

Consider the following production and cost data for two products, A and B: Product A Product B Contribution margin per unit $260 $240 Machine set-ups needed per unit: 20 set-ups 16 set-ups The company can only perform 130,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? A) $1,690,000. B) $1,950,000. C) $1,820,000. D) $3,640,000.

B) $1,950,000.

Venezia Company employs a standard cost system in which direct materials inventory is carried at standard cost. Venezia has established the following standards for the prime costs of one unit of product: Standard Quantity|Standard Price|Standard Cost Direct materials 6.0lbs $ 7.00/pound $42.00 Direct labor 1.3 hours $22.00/hour 28.60 $70.60 During June, Venezia purchased 165,000 pounds of direct material at a total cost of $1,171,500. The total factory wages for June were $800,000, 90 percent of which were for direct labor. Venezia manufactured 25,000 units of product during June using 151,000 pounds of direct material and 32,000 direct labor hours. The direct labor rate variance for June is: A) $16,000 favorable. B) $16,000 unfavorable. C) $96,000 favorable. D) $96,000 unfavorable.

B) $16,000 unfavorable.

The following account balances have been provided for the end of the most recent year: Total assets $300,000 Total common stock $100,000 (10,000 shares) Total preferred stock $20,000 (2,000 shares) Total stockholders' equity $240,000 The book value per share of common stock is: A) $20. B) $22. C) $25. D) $28.

B) $22. Book value per share of common stock = Common stockholders' equity ÷ number of shares of common stock outstanding Book value per share of common stock = (Total stockholders' equity - Preferred stock) ÷ number of shares of common stock outstanding Book value per share of common stock = ($240,000 - $20,000) ÷ $10,000 = $22

The following is Montague Corporation's contribution format income statement for last month: Sales $2,000,000 Less variable expenses 1,400,000 Contribution margin 600,000 Less fixed expenses 360,000 Net income $ 240,000 The company has no beginning or ending inventories. A total of 40,000 units were produced and sold last month. If sales increase by 200 units, how much should net income increase? A) $800 B) $3,000 C) $5,000 D) $9,600

B) $3,000

The following information has been provided by the Douglas Grocery Store for the first quarter of the year: Sales $700,000 Variable selling expense 70,000 Fixed selling expenses 50,000 Cost of goods sold 320,000 Fixed administrative expenses 110,000 Variable administrative expenses 30,000 The gross margin of Douglas Grocery Store for the first quarter is: A) $280,000. B) $380,000. C) $420,000. D) $440,000.

B) $380,000. Sales $700,000 Cost of goods sold 320,000 Gross margin $380,000

Flaherty Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities for the current year are presented below for the three activity cost pools: Estimated Overhead Cost: Expected Activity: Activity 1 $36,000 1,800 Activity 2 $20,000 2,000 Activity 3 $40,000 2,500 Actual activity for the current year was as follows: Activity 1 1,815 Activity 2 2,005 Activity 3 2,490 The amount of overhead applied for Activity 3 during the year was closest to: A) $36,300. B) $39,840. C) $40,000. D) $96,190.

B) $39,840. Activity rate for Activity 3: $40,000 ÷ 2,500 = $16.00 Amount of overhead applied for Activity 3: 2,490 x $16.00 = $39,840

The following data (in thousands of dollars) have been taken from the accounting records of Casey Corporation for the just completed year. Administrative expense $ 30 Direct labor 40 Finished goods inventory, beginning 24 Finished goods inventory, ending 32 Manufacturing overhead 46 Purchases of raw material 24 Raw materials inventory, beginning 8 Raw materials inventory, ending 14 Sale 1,98 Selling expense 28 Work in process inventory, beginning 14 Work in process inventory, ending 10 The net income for the year (in thousands of dollars) was: A) $300. B) $400. C) $500. D) $980.

B) $400. Sale $1,98 Cost of goods sold 1,00 Gross profit 98 Operating expenses Administrative expenses $300 Selling expense 28 Net income $ 40

Under Eastern Company's job-order costing system, manufacturing overhead is applied to Work in Process inventory using a predetermined overhead rate. During May, Eastern's transactions included the following: Direct labor cost incurred $214,000 Direct materials issued to production 180,000 Indirect materials issued to production 16,000 Manufacturing overhead cost applied 226,000 Manufacturing overhead cost incurred 250,000 Eastern Company had no beginning or ending inventories in May. What was the cost of goods manufactured for May? A) $604,000 B) $620,000 C) $644,000 D) $660,000

B) $620,000 Work in process, beginning of period $ 0 Direct materials issued to production 180,000 Direct labor cost incurred 214,000 Manufacturing overhead cost applied 226,000 Total manufacturing costs 620,000 Less: work in process, end of period (0) Cost of goods manufactured $620,000

Venezia Company employs a standard cost system in which direct materials inventory is carried at standard cost. Venezia has established the following standards for the prime costs of one unit of product: Standard Quantity|Standard Price|Standard Cost Direct materials 6.0lbs $ 7.00/pound $42.00 Direct labor 1.3 hours $22.00/hour 28.60 $70.60 During June, Venezia purchased 165,000 pounds of direct material at a total cost of $1,171,500. The total factory wages for June were $800,000, 90 percent of which were for direct labor. Venezia manufactured 25,000 units of product during June using 151,000 pounds of direct material and 32,000 direct labor hours. The direct material quantity variance for June is: A) $7,000 favorable. B) $7,000 unfavorable. C) $7,100 favorable. D) $7,100 unfavorable.

B) $7,000 unfavorable. First, calculate the standard quantity as follows: 25,000 units x 6.0 pounds per unit = 150,000 pounds Then calculate the material quantity variance as follows: Materials quantity variance = Standard price x (Actual quantity - Standard quantity) Materials quantity variance = SP x (AQ - SQ) Materials quantity variance = $7.00 x (151,000 - 150,000) = $7,000 Unfavorable (U)

The Firenze Company applies manufacturing overhead costs to products on the basis of direct labor-hours. The standard cost card shows that 6 direct labor-hours are required per unit of product. For August, the company budgeted to work 180,000 direct labor-hours and to incur the following total manufacturing overhead costs: Total variable overhead costs $198,000 Total fixed overhead costs $237,600 During August, the company completed 28,000 units of product, worked 172,000 direct labor-hours, and incurred the following total manufacturing overhead costs: Total variable overhead costs $197,800 Total fixed overhead costs $230,600 The denominator activity in the predetermined overhead rate is 180,000 direct labor-hours. The variable overhead spending variance for August is: A) $8,600 F. B) $8,600 U. C) $13,000 F. D) $13,000 U.

B) $8,600 U.

Artsy Sportswear manufactures a specialty line of silk-screened T-shirts. The company uses a job-order costing system. During May, the following costs were incurred on Job PS4: direct materials $27,400 and direct labor $9,600. In addition, selling and shipping costs of $14,000 were incurred on the job. Manufacturing overhead was applied at the rate of $25 per machine- hour and Job PS4 required 160 machine-hours. If Job PS4 consisted of 5,000 shirts, the cost of goods sold per shirt was: A) $7.40 B) $8.20 C) $11.00 D) $25.00

B) $8.20 First, determine the amount of manufacturing overhead assigned to Job PS4: Predetermined overhead rate x Actual machine-hours = Overhead assigned $25.00/machine hour x 160 machine-hours = $4,000 Then, accumulate the total manufacturing costs for Job PS4, and divide by the number of units in the job to get the cost (or cost of goods sold) per unit: Direct materials $27,400 Direct labor 9,600 Manufacturing overhead 4,000 Total manufacturing costs of job PS4 41,000 Number of units (shirts) in job PS4 5,000 Cost of goods sold per shirt $ 8.20 Note that the selling and shipping costs were ignored; these costs are operating costs and, as such, are not a component of cost of goods sold.

The following is Montague Corporation's contribution format income statement for last month: Sales $2,000,000 Less variable expenses 1,400,000 Contribution margin 600,000 Less fixed expenses 360,000 Net income $ 240,000 The company has no beginning or ending inventories. A total of 40,000 units were produced and sold last month. What is the company's margin of safety in dollars? A) $240,000 B) $800,000 C) $1,200,000 D) $1,760,000

B) $800,000

Champion Company produces and sells volleyballs. To guard against out of stock situations, the company requires that 20% of the next month's sales be on hand at the end of each month. Budgeted sales of volleyballs over the next four months are: January February March April Budgeted sales in units: 60,000 80,000 120,000 100,000 Budgeted production for March would be: A) 100,000 units. B) 116,000 units. C) 124,000 units. D) 140,000 units.

B) 116,000 units. Sales 120,000 Plus planned ending inventory (100,000 x .20) 20,000 Less beginning inventory (120,000 x .20) (24,000) Units to be produced 116,000

Simmons Company has gathered the following data on a proposed investment project. Investment required in equipment $400,000 Annual cash inflows $80,000 Salvage value $-0- Life of the investment 10 years Discount rate 10% Assume that excess of incremental revenues over the incremental expenses (including depreciation) equal the annual cash inflows. The simple rate of return on the investment is closest to: A) 10%. B) 20%. C) 30%. D) 40%.

B) 20%.

The following is Montague Corporation's contribution format income statement for last month: Sales $2,000,000 Less variable expenses 1,400,000 Contribution margin 600,000 Less fixed expenses 360,000 Net income $ 240,000 The company has no beginning or ending inventories. A total of 40,000 units were produced and sold last month. What is the company's break-even in units? A) 0 units B) 24,000 units C) 36,000 units D) 40,000 units

B) 24,000 units

The following data are available for the Midwest Division of Dimension Products, Inc. and the single product it makes. Unit selling price $40 Variable cost per unit $24 Annual fixed costs $560,000 Average operating assets $3,000,000 How many units must the Midwest Division sell each year to have an ROI of 16%? A) 52,000. B) 65,000. C) 240,000. D) 1,300,000.

B) 65,000.

Which of the following accounts should be included in the calculation of the acid-test ratio? Accounts Prepaid Receivable Inventory Expense A) yes no yes B) yes no no C) no yes yes D) no yes no

B) Answer B

Which of the following is not an operating asset? A) Cash B) Common stock C) Inventory D) Plant equipment

B) Common stock

Which costs will change with an increase in activity within the relevant range? A) Total fixed costs and total variable cost. B) Per unit fixed costs and total variable cost. C) Per unit variable cost and per unit fixed cost. D) Per unit fixed cost and total fixed cost.

B) Per unit fixed costs and total variable cost.

When there are batch-level or product-level costs, in comparison to a traditional cost system, an activity-based costing system ordinarily will: A) Shift costs from low-volume to high-volume products. B) Shift costs from high-volume to low-volume products. C) Shift costs from standardized to specialized products. D) Shift costs from specialized to standardized products.

B) Shift costs from high-volume to low-volume products.

In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be: A) Less than the net present value obtained using the incremental cost approach. B) The same as the net present value obtained using the incremental cost approach. C) Greater than the net present value obtained using the incremental cost approach. D) Indeterminable.

B) The same as the net present value obtained using the incremental cost approach.

Colloseu Company would like to classify the following costs according to cost behavior. The following data is available: July August Sales in units 3,000 3,200 Cost #1 $ 70,000 $ 72,000 Cost #2 32,000 32,000 Cost #3 135,000 144,000 Which of the following classifications best describes the behavior of Cost #3? A) Mixed. B) Variable. C) Fixed. D) none of the above.

B) Variable. Using the data provided above, cost #3 is variable (rather than fixed or mixed) in nature; the per unit cost is $45.00 at both 3,000 and 3,200 units sold, as shown below: July August Sales in units 3,000 3,200 Cost #3 135,000 144,000 Cost per unit $45.00 $45.00

In a process costing system, the journal entry used to record the transfer of units from Department A, a processing department, to Department B, the next processing department includes a debit to: A) Work in Process - Department A and a credit to Work in Process - Department B. B) Work in Process - Department B and a credit to Work in Process - Department A. C) Work in Process - Department B and a credit to Materials. D) Finished Goods and a credit to Work in Process - Department B.

B) Work in Process - Department B and a credit to Work in Process - Department A.

The "standard quantity allowed" or "standard hours allowed" is computed by multiplying the: A) actual input in units by the standard output allowed. B) actual output in units by the standard input allowed. C) actual output in units by the standard output allowed. D) standard output in units by the standard input allowed.

B) actual output in units by the standard input allowed.

If the cost of goods manufactured is greater than the cost of goods sold, then: A) work in process inventory has decreased during the period. B) finished goods inventory has increased during the period. C) total manufacturing costs must be greater than cost of goods manufactured. D) finished goods inventory has decreased during the period.

B) finished goods inventory has increased during the period.

Which of the following variances is caused by a difference between the denominator activity in the predetermined overhead rate and the standard hours allowed for the actual production of the period? A) fixed overhead budget variance. B) fixed overhead volume variance. C) variable overhead efficiency variance. D) variable overhead spending variance.

B) fixed overhead volume variance.

Standards that do not allow for machine breakdowns or other work interruptions and that require peak efficiency at all times are known as: A) budgeted standards. B) ideal standards. C) normal standards. D) practical standards.

B) ideal standards.

The budget or schedule that provides necessary input data for the direct materials budget is the: A) cash budget. B) production budget. C) raw materials purchases budget. D) schedule of cash collections.

B) production budget.

An opportunity cost is: A) the difference between the total cost of one alternative and the total cost of another alternative. B) the benefit forgone when one alternative is selected rather than another. C) a cost that is saved by not adopting a given alternative. D) a cost that continues to be incurred even when there is no activity.

B) the benefit forgone when one alternative is selected rather than another.

If a company isolates variances at the earliest point in time, the appropriate time to recognize a direct material price variance would be when: A) the material is issued. B) the material is purchased. C) the material is used in production. D) production is completed.

B) the material is purchased.

Financial leverage is negative when: A) the return on total assets is less than the rate of return on common stockholders' equity. B) the return on total assets is less than the rate of return demanded by creditors. C) total liabilities are less than stockholders' equity. D) total liabilities are less than total assets.

B) the return on total assets is less than the rate of return demanded by creditors.

Break even volume = Fixed costs/Sales price - Variable cost per unit

Break-even analysis helps you determine how much you need to sell in order to break even — that is, to earn no net loss or profit. To figure out the break-even point, use this formula.

Analyze a capital investment project using break-even time.

Break-even time (BET) is a method for evaluating capital investments by restating future cash flows in terms of their present values (discounting the cash flows) and then calculating the payback period using these present values of cash flows.

Compute and interpret break-even volume in units.

Break-even volume in units is defined as total fixed costs divided by contribution margin per unit. The result gives managers a unit goal to achieve break even; if the goal is surpassed, the company earns income.

The following data (in thousands of dollars) have been taken from the accounting records of Casey Corporation for the just completed year. Administrative expense $ 30 Direct labor 40 Finished goods inventory, beginning 24 Finished goods inventory, ending 32 Manufacturing overhead 46 Purchases of raw material 24 Raw materials inventory, beginning 8 Raw materials inventory, ending 14 Sale 1,98 Selling expense 28 Work in process inventory, beginning 14 Work in process inventory, ending 10 The cost of goods manufactured (finished) for the year (in thousands of dollars) was: A) $1,000. B) $1,040. C) $1,080. D) $1,180.

C) $1,080. Work in process inventory, beginning $ 14 Raw materials used in production 18 Direct labor 40 Manufacturing overhead 46 Total manufacturing cost 1,18 Less: work in process inventory, ending (100) Cost of goods manufactured $1,08

Shipping expense is $34,000 for 16,000 pounds shipped and $40,000 for 19,000 pounds shipped. Assuming that this activity is within the relevant range, if the company ships 18,000 pounds, its expected shipping expense is closest to: A) $37,000. B) $37,895. C) $38,000. D) $38,250.

C) $38,000.

Reddy Corporation manufactures coolers. The company can manufacture 600,000 coolers a year at a variable cost of $1,500,000 and a fixed cost of $900,000. Based on management's predictions for next year, 480,000 coolers will be sold at the regular price of $10.00 each. In addition, a special order was placed for 120,000 coolers to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order? A) $240,000 B) $300,000 C) $420,000 D) $720,000

C) $420,000 First, compute the variable cost per unit as follows: $1,500,000 - 600,000 = $2.50 per unit Then, determine the impact on net operating income as follows: Increase in sales (120,000 x ($10 x 60%)) $720,000 Less increase in variable costs (120,000 x $2.50) 300,000 Increase in net operating income $420,000

Roberto Company has a cash balance of $18,000 on April 1. The company is required to maintain a minimum cash balance of $12,000. During April expected cash receipts are $90,000. Expected cash disbursements during the month total $104,000. During April the company will need to borrow: A) $4,000. B) $6,000. C) $8,000. D) $14,000.

C) $8,000. Required minimum cash balance $12,000 Cash balance on April 1 $ 18,000 Expected April cash receipts 90,000 Less expected April cash disbursements (104,000) Expected cash balance on April 30 4,000 $ 8,000

Collins Company's net income last year was $150,000 and its interest expense was $20,000. Total assets at the beginning of the year were $1,300,000 and total assets at the end of the year were $1,220,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to: A) 11.9%. B) 12.4%. C) 13.0%. D) 13.5%.

C) 13.0%. Return on total assets = [Net income + (Interest expense x (1 - Tax rate)] ÷ average total assets Return on total assets = [$150,000 + ($20,000 x (1 - .30)] ÷ [($1,300,000 + $1,220,000) ÷ 2] Return on total assets = ($150,000 + $14,000) ÷ $1,260,000 = 13.0%

The following is Montague Corporation's contribution format income statement for last month: Sales $2,000,000 Less variable expenses 1,400,000 Contribution margin 600,000 Less fixed expenses 360,000 Net income $ 240,000 The company has no beginning or ending inventories. A total of 40,000 units were produced and sold last month. What is the company's degree of operating leverage? A) 0.12 B) 0.4 C) 2.5 D) 3.3

C) 2.5

Selected financial data for Spelling Company appear below: Account Balances End of Year Beginning of Year Common stock $800,000 $600,000 Preferred stock 250,000 240,000 Retained earnings 370,000 150,000 During the year, the company paid dividends of $20,000 on its preferred stock. The company's net income for the year was $240,000. The company's return on common stockholders' equity for the year is closest to: A) 17%. B) 19%. C) 23%. D) 25%.

C) 23%. Return on common stockholders' equity = (Net income - Preferred dividends) ÷ average common stockholders' equity Return on common stockholders' equity = ($240,000 - $20,000) ÷ [(($800,000 + $370,000) + ($600,000 + $150,000)) ÷ 2] Return on common stockholders' equity = $220,000 ÷ [(($1,170,000 + $750,000) ÷ 2] Return on common stockholders' equity = $220,000 ÷ $960,000 = 22.92%

The Western Division of Vollick Enterprises recorded operating data as follows for the past year. Sales $400,000 Net operating income 50,000 Average operating assets 200,000 Stockholders' equity 160,000 Residual income 26,000 For the past year, the return on investment was: A) 15.75%. B) 20.50%. C) 25.00% D) 31.25%.

C) 25.00%

The following data have been taken from Garrett Company's financial records for the current year: Book value per share $140 Dividend per share $ 12 Earnings per share $20 Market price per share $180 The price-earnings ratio is: A) 1.67 to 1. B) 7.0 to 1. C) 9.0 to 1. D) 15.0 to 1.

C) 9.0 to 1. Price-earnings ratio = Market price per share ÷ earnings per share Price-earnings ratio = 180 ÷ 20 = 9.0 to 1

Roma Restauranta compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, would the restaurant usually report favorable variances on fixed supervisory salaries and variable food costs? Supervisory Salaries Food Costs A) Yes Yes B) Yes No C) No Yes D) No No A) Answer A B) Answer B C) Answer C D) Answer D

C) Answer C

The wages of materials handling personnel in a factory would usually be considered: Indirect labor Manufacturing overhead A) No Yes B) Yes No C) Yes Yes D) No No

C) Answer C

Colloseu Company would like to classify the following costs according to cost behavior. The following data is available: July August Sales in units 3,000 3,200 Cost #1 $ 70,000 $ 72,000 Cost #2 32,000 32,000 Cost #3 135,000 144,000 Which of the following classifications best describes the behavior of Cost #2? A) Mixed. B) Variable. C) Fixed. D) none of the above.

C) Fixed.

In a job-order cost system, indirect labor costs would be recorded as a debit to: A) Raw Materials. B) Work in Process. C) Manufacturing Overhead. D) Finished Goods.

C) Manufacturing Overhead.

Which one of the following costs should not be considered an indirect cost of serving a particular customer at a Pizza Hut franchise? A) The salary of the franchise's manager. B) The cost of the tables and chairs used to furnish the restaurant. C) The cost of the dough used to make the pizza that is ordered. D) The cost of lighting and heating the restaurant.

C) The cost of the dough used to make the pizza that is ordered.

An increase in the Accounts Receivable account of a company from $20,000 at the beginning of the year to $25,000 at the end of the year would be shown on the company's statement of cash flows prepared under the indirect method as: A) an addition to net income of $5,000 in order to arrive at cash flows from operating activities. B) an addition to net income of $15,000 in order to arrive at cash flows from operating activities. C) a deduction from net income of $5,000 in order to arrive at cash flows from operating activities. D) a deduction from net income of $10,000 in order to arrive at cash flows from operating activities.

C) a deduction from net income of $5,000 in order to arrive at cash flows from operating activities.

A segment of a business responsible for both revenues and expenses would be referred to as: A) a cost center. B) an investment center. C) a profit center. D) residual income.

C) a profit center.

The salary of the vice president of finance would be considered a(n): A) manufacturing cost. B) product cost. C) administrative cost. D) selling expense.

C) administrative cost.

Assuming that sales and net income remain the same, a company's return on investment will: A) increase if its operating assets increase. B) decrease if its operating assets decrease. C) decrease if its turnover decreases. D) decrease if its turnover increases.

C) decrease if its turnover decreases.

Expense #1 is a fixed cost; expense #2 is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that: A) expense #1 will be unchanged. B) expense #2 will decrease. C) expense #1 will decrease. D) expense #2 will increase.

C) expense #1 will decrease.

A company has provided the following data: Sales 6,000 units Sales price $100 per unit Variable cost $50 per unit Fixed cost $150,000 If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net income will: A) decrease by $30,000. B) increase by $30,000. C) increase by $60,000. D) increase by $210,000.

C) increase by $60,000.

A company's return on investment is computed by: A) dividing its margin by its turnover. B) dividing its turnover by its average operating assets. C) multiplying its margin by its turnover. D) multiplying its by its average operating assets.

C) multiplying its margin by its turnover.

The higher the denominator level of activity: A) the more profitable operations likely will be. B) the less likely is the occurrence of a volume variance. C) the lower the unit product cost. D) the higher the unit product cost.

C) the lower the unit product cost.

Penn Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $100,000 and direct labor hours would be 10,000. The actual figures for the year were $110,000 for manufacturing overhead and 10,500 direct labor hours. The cost records for the year will show: A) overapplied overhead of $10,000. B) underapplied overhead of $10,000. C) underapplied overhead of $5,000. D) overapplied overhead of $5,000.

C) underapplied overhead of $5,000. First, calculate the predetermined overhead rate (based on direct labor hours here): Estimated overhead costs ( Estimated direct labor hours = Predetermined rate $100,000 ( 10,000 direct labor hours = $10.00/direct labor hour Then, determine the amount of manufacturing overhead assigned during the period: Predetermined overhead rate x Actual direct labor hours = Overhead assigned $10.00/direct labor hour x 10,500 direct labor hours = $105,000 Finally, compare the actual manufacturing overhead costs to the amount assigned, and decide whether it is over- or underapplied: Actual $110,000 Assigned 105,000 Balance (underapplied) $ 5,000

Compute the break-even point for a multiproduct company.

CVP analysis can be applied to a multiproduct company by expressing sales volume in terms of composite units. A composite unit consists of a specific number of units of each product in proportion to their expected sales mix. Multiproduct CVP analysis treats this composite unit as a single product.

Determine cash flows from both investing and financing activities.

Cash flows from both investing and financing activities are determined by identifying the cash flow effects of transactions and events affecting each balance sheet account related to these activities. All cash flows from these activities are identified when we can explain changes in these accounts from the beginning to the end of the period.

Describe important features of job order production.

Certain companies called job order manufacturers produce custom-made products for customers. These customized products are produced in response to a customer's orders. A job order manufacturer produces products that usually are different and, typically, produced in low volumes. The production systems of job order companies are flexible and are not highly standardized.

Mixed costs:

Combination of fixed and variable costs

Net income = (Sales price x Volume) - Total cost = (Sales price x Volume - [(Variable cost per unit x Volume) + Fixed costs] = (Sales price x Volume) - (Variable cost per unit x Volume) - Fixed costs Net income = (Sales price - Variable cost per unit(Volume)-Fixed costs

Combining these two equations gives you the super useful formula for understanding how volume affects profits.

Process costing:

Companies use process costing when partially completed units are moved from one production area to another. Process costing assumes that the products you produce are similar or even identical. Process costing questions often address how costs move from one production department to another. Keep in mind that, almost always, material costs are put into production before labor costs. If you're making leather baseball gloves, you need material (leather) in production before you can do anything to it (cut, sew, treat the leather, and so on). If you keep that in mind, computing material and labor costs may be easier.

Total cost = (Variable cost per unit x Volume) + Fixed costs

Consider how production volume affects total costs.

Cost Volume Profit (CVP) Formulas:

Contribution margin = Sales - Variable expenses (manufacturing and non-manufacturing) Net operating income = Contribution margin - Fixed expenses (manufacturing and non manufacturing) Contribution margin ratio = Contribution margin / Sales Break even point (units) = Fixed expenses / Unit contribution margin Break even point (dollar sales) = Fixed expenses / CM ratio Units sales to attain target profit = (Fixed expenses + Target profit) / Unit contribution margin Dollar sales to attain target profit = (Fixed expenses + Target profit) / Contribution margin ratio Margin of safety = Total budgeted or actual sales - Break even sales Margin of safety percentage or margin of safety ratio = Margin of safety / Total budgeted or actual sales Degree of operating leverage = Contribution margin / Net operating income

Total contribution margin = Total sales - Total variable cost

Contribution margin measures how selling one item, or a group of items, increases net income. To calculate contribution margin, subtract variable costs from sales. Contribution margin helps managers by explaining how decisions will impact income. Should you prepare a special order with a contribution margin of $100,000? Yes, because it will increase net income by $100,000. Should you prepare another special order with a contribution margin of negative $50,000? No, because it will decrease net income.

Compute the contribution margin and describe what it reveals about a company's cost structure.

Contribution margin per unit is a product's sales price less its total variable costs. Contribution margin ratio is a product's contribution margin per unit divided by its sales price. Unit contribution margin is the amount received from each sale that contributes to fixed costs and income. The contribution margin ratio reveals what portion of each sales dollar is available as contribution to fixed costs and income.

Describe different types of cost behavior in relation to production and sales volume.

Cost behavior is described in terms of how its amount changes in relation to changes in volume of activity within a relevant range. Fixed costs remain constant to changes in volume. Total variable costs change in direct proportion to volume changes. Mixed costs display the effects of both fixed and variable components. Step-wise costs remain constant over a small volume range, then change by a lump sum and remain constant over another volume range, and so on. Curvilinear costs change in a nonlinear relation to volume changes.

Job order cost:

Cost of a batch of specially made goods

Cost per unit:

Cost of a single unit of product

Process cost:

Cost of similar goods made in large quantities on an assembly line

Direct cost:

Cost that you can trace to a specific product

Indirect cost:

Cost that you can't easily trace to a specific product

Net income = (Sales price - Variable cost per unit)(Volume) - Fixed costs

Cost-volume-profit (CVP) analysis helps you understand how changes in volume affect costs and net income. If you know sales price, variable cost per unit, volume, and fixed costs, this formula will predict your net income.

Describe several applications of cost-volume-profit analysis.

Cost-volume-profit analysis can be used to predict what can happen under alternative strategies concerning sales volume, selling prices, variable costs, or fixed costs. Applications include "what-if" analysis, computing sales for a target income, and break-even analysis.

Expense:

Costs deducted from revenues on the income statement

Product costs:

Costs needed to make goods; considered part of inventory until sold

Period costs:

Costs not needed to make goods; recorded as expenses when incurred

Opportunity costs:

Costs of income lost because you chose a different alternative

Describe and record the flow of labor costs in job order cost accounting.

Costs of labor flow from clock cards to the Factory Payroll account and then to either job cost sheets or the Indirect Labor account in the factory overhead ledger.

Describe and record the flow of materials costs in job order cost accounting.

Costs of materials flow from receiving reports to materials ledger cards and then to either job cost sheets or the Indirect Materials account in the factory overhead ledger.

Define product and period costs and explain how they impact financial statements.

Costs that are capitalized because they are expected to have future value are called product costs; costs that are expensed are called period costs. This classification is important because it affects the amount of costs expensed in the income statement and the amount of costs assigned to inventory on the balance sheet. Product costs are commonly made up of direct materials, direct labor, and overhead. Period costs include selling and administrative expenses.

Incremental costs:

Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs

Variable costs:

Costs that change in direct proportion with activity level

Irrelevant costs:

Costs that don't change depending on which alternative you choose

Fixed costs:

Costs that don't change with activity level

Controllable costs:

Costs that you can change

Noncontrollable costs:

Costs that you can't change

Sunk costs:

Costs you've already paid or committed to paying

Fox Valley Manufacturing Company's beginning work in process inventory consisted of 10,000 units, 100% complete with respect to materials cost and 40% complete with respect to conversion costs. The total cost in the beginning inventory was $60,000. During the month, 100,000 units were transferred out. The equivalent unit cost was computed to be $4.00 for materials and $7.40 for conversion costs under the weighted-average method. Given this information, the total cost of the units completed and transferred out was: A) $960,000. B) $1,020,000. C) $1,080,000. D) $1,140,000.

D) $1,140,000. Units transferred out: Materials (100,000 units x $4.00 per unit): $ 400,000 Labor and overhead (100,000 units x $7.40 per unit): 740,000 Total cost of units transferred out: $1,140,000

Given the cost formula Y = $30,000 + $5X, total cost at an activity level of 16,000 units would be: A) $30,000. B) $46,000. C) $80,000. D) $110,000.

D) $110,000. Total cost = $30,000 + (16,000 units x $5.00 per unit) = $110,000

Marseille Company, a clothing manufacturer, uses a standard costing system. Each unit of a finished product contains 2 yards of cloth. However, there is unavoidable waste of 25%, calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is $6 per yard. The standard direct material cost for cloth per unit of finished product is: A) $9.60. B) $12.00. C) $14.00. D) $15.00.

D) $15.00. Feedback: 2 yards + .5 yards (or 2 yards x 25%) = 2.5 yards 2.5 yards x $6 per yard = $15.00

Venezia Company employs a standard cost system in which direct materials inventory is carried at standard cost. Venezia has established the following standards for the prime costs of one unit of product: Standard Quantity|Standard Price|Standard Cost Direct materials 6.0lbs $ 7.00/pound $42.00 Direct labor 1.3 hours $22.00/hour 28.60 $70.60 During June, Venezia purchased 165,000 pounds of direct material at a total cost of $1,171,500. The total factory wages for June were $800,000, 90 percent of which were for direct labor. Venezia manufactured 25,000 units of product during June using 151,000 pounds of direct material and 32,000 direct labor hours. The price variance for the direct material acquired by the company during June is: A) $15,100 favorable. B) $15,100 unfavorable. C) $16,500 favorable. D) $16,500 unfavorable.

D) $16,500 unfavorable.

Angelina Company uses activity-based costing to determine the costs of its two products: A and B. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Activity Estimated Expected Activity Cost Pool Cost Product A Product B Total Activity 1 $19,800 800 300 1,100 Activity 2 $16,000 2,200 1,800 4,000 Activity 3 $14,000 400 300 700 The activity rate under the activity-based costing system for Activity 3 is closest to: A) $4.00. B) $8.59. C) $18.00. D) $20.00.

D) $20.00. $14,000 ÷ 700 = $20.00

The Jamestown Company makes and sells a single product. Each unit of product requires 2.6 hours of labor at a labor rate of $9.10 per hour. The company needs to prepare a Direct Labor Budget for the second quarter of next year. The budgeted direct labor cost per unit of product would be: A) $14.00. B) $18.20. C) $20.80. D) $23.66.

D) $23.66. Labor rate $ 9.10 Direct labor hours required per unit of product X 2.6 Budgeted direct labor cost per unit of product $23.66

Riley Company recorded the following events for the year just ended: Retirement of preferred stock $100,000 Sale of bonds issued by other companies 150,000 Interest paid on notes payable 70,000 Dividends paid to shareholders 180,000 Collection by Riley of a loan made to a subsidiary . 110,000 Payment of deferred taxes 90,000 The net change in cash resulting from investing activities for the year was: A) ($5,000). B) $10,000. C) $40,000. D) $260,000

D) $260,000 Inflow(Outflow) Sale of bonds issued by other companies $150,000 Collection by Riley of a loan made to a subsidiary . . 110,000 Net cash provided by investing activities $260,000

Riley Company recorded the following events for the year just ended: Retirement of preferred stock $100,000 Sale of bonds issued by other companies 150,000 Interest paid on notes payable 70,000 Dividends paid to shareholders 180,000 Collection by Riley of a loan made to a subsidiary . 110,000 Payment of deferred taxes 90,000 The net decrease in cash resulting from financing activities for the year was: A) $70,000. B) $90,000. C) $190,000. D) $280,000.

D) $280,000. Inflow(Outflow) Retirement of preferred stock $ (100,000) Dividends paid to shareholders (180,000) Net cash provided by financing activities $(280,000)

The Batavia Company uses the weighted-average method in its process costing system. The company has only a single processing department. The company's ending work in process inventory on April 30 consisted of 36,000 units. The units in the ending work in process inventory were 100% complete with respect to materials and 60% complete with respect to labor and overhead. If the cost per equivalent unit for April was $5.50 for materials and $8.50 for labor and overhead, the total cost assigned to the ending work in process inventory was: A) $302,400. B) $320,400. C) $504,000. D) $381,600.

D) $381,600. Work in Process, April 30: Materials (36,000 units x 100% x $5.50 per unit): $198,000 Labor and overhead (36,000 units x 60% x $8.50 per unit): 183,600 Total cost of work in process, April 30: $381,600

The Firenze Company applies manufacturing overhead costs to products on the basis of direct labor-hours. The standard cost card shows that 6 direct labor-hours are required per unit of product. For August, the company budgeted to work 180,000 direct labor-hours and to incur the following total manufacturing overhead costs: Total variable overhead costs $198,000 Total fixed overhead costs $237,600 During August, the company completed 28,000 units of product, worked 172,000 direct labor-hours, and incurred the following total manufacturing overhead costs: Total variable overhead costs $197,800 Total fixed overhead costs $230,600 The denominator activity in the predetermined overhead rate is 180,000 direct labor-hours. The variable overhead efficiency variance for August is: A) $0. B) $3,600 F. C) $4,400 F. D) $4,400 U.

D) $4,400 U.

The Calculex Company has 800 obsolete calculators that are carried in inventory at a total cost of $53,400. If these calculators are upgraded at a total cost of $20,000, they can be sold for a total of $60,000. As an alternative, the calculators can be sold in their present condition for $22,400. The sunk cost in this situation is: A) $0 B) $20,000. C) $22,400. D) $53,400.

D) $53,400.

Brown Company produces 2,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: Variable manufacturing cost $24 Fixed manufacturing cost 18 Unit product cost $42 The part can be purchased from an outside supplier at $40 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on Brown's net operating income as a result of buying the part from the outside supplier would be: A) $4,000 increase. B) $4,000 decrease. C) $8,000 increase. D) $8,000 decrease.

D) $8,000 decrease. Cost of making the parts (2,000 x $42) $84,000 Cost of purchasing the parts (2,000 x $40) $80,000 Fixed manufacturing costs avoided if parts purchased (2,000 x $18 x 2/3) 24,000 56,000 Annual impact on net operating income $8,000

Glenn Company's predetermined overhead rate is based on direct labor costs. The company's Work in Process inventory account has a balance of $1,200, which relates to the one job that was not complete at the end of an accounting period. The related job cost sheet includes total charges of $200 for direct materials and $500 for direct labor. The company's predetermined overhead rate, as a percentage of direct labor costs, must be: A) 17%. B) 40%. C) 50%. D) 100%.

D) 100%. First, determine the amount of manufacturing overhead applied to the uncompleted job(s): Direct materials + Direct labor + Manufacturing overhead = Work in Process balance $200 + $500 + Manufacturing overhead = $1,200 Manufacturing overhead = $500 Then, solve for the predetermined overhead rate (based on direct labor cost here): Predetermined overhead rate x Direct labor cost = Manufacturing overhead applied Predetermined overhead rate x $500 = $500 (from above) Predetermined overhead rate = $500 ($500 = 100%)

The Linkage Company uses predetermined overhead rates to apply manufacturing overhead to jobs. The predetermined overhead rate is based on labor cost in Dept. A and on machine hours in Dept. B. At the beginning of the year, the company made the following estimates: Dept A Dept B Direct labor cost $15,000 $20,000 Manufacturing overhead 30,000 25,000 Direct labor hours 12,000 16,000 Machine hours 1,000 5,000 What predetermined overhead rates would be used in Dept A and Dept B, respectively? A) $15 and 110% B) 50% and $5.00 C) 50% and $8.00 D) 200% and $5.00

D) 200% and $5.00 Dept. A: $30,000 ( $15,000 = 200%) Dept. B: $25,000 (5,000 machine hours = $5.00 per machine hour)

Simmons Company has gathered the following data on a proposed investment project. Investment required in equipment $400,000 Annual cash inflows $80,000 Salvage value $-0- Life of the investment 10 years Discount rate 10% The payback period for the investment is closest to: A) 0.2 years. B) 1.0 years. C) 3.0 years. D) 5.0 years.

D) 5.0 years.

Penway Company sells three products: A, B and C. Product A's unit contribution margin is higher than Product B's which is higher than Products C's. Which one of the following events is most likely to increase the company's overall break-even point? A) The installation of new automated equipment and subsequent lay-off of factory workers. B) A decrease in Product C's selling price. C) An increase in the overall market demand for Product B. D) A change in the relative market demand for the products, with the increase favoring Product A relative to Product B and Product C.

D) A change in the relative market demand for the products, with the increase favoring Product A relative to Product B and Product C.

Which of the following statements is (are) true? A) An activity-based costing system is generally easier to implement and maintain than a traditional costing system. B) One of the goals of activity-based management is the elimination of waste by allocating costs to products that waste resources. C) Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct labor-hours. D) Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool.

D) Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool.

Which of the following statements is (are) true? A) A manufacturer of ink cartridges would ordinarily use process costing rather than job-order costing. B) The output of a processing department must be homogeneous in order to use process costing. C) If a company uses a process costing system it accumulates costs by processing department rather than by job. D) All of the above are true statements.

D) All of the above are true statements.

The sale of land at a gain would be shown on the statement of cash flows prepared under the indirect method in which of the following manners? The cash received would be shown: A) As an adjustment to net income and the gain would not appear on the statement of cash flows. B) Under Investing Activities and the gain would not appear on the statement of cash flows. C) Under Investing Activities and the gain would be added to net income. D) Under Investing Activities and the gain would be deducted from net income.

D) Under Investing Activities and the gain would be deducted from net income.

All of the following are examples of batch-level activities except: A) Purchase order processing. B) Setting up equipment. C) The clerical activity associated with processing purchase orders to produce an order for a standard product. D) Worker recreational facilities.

D) Worker recreational facilities.

An increase in the Prepaid Insurance account of $6,000 over the course of a year would be shown on the company's statement of cash flows prepared under the indirect method as: A) an addition of $6,000 under financing activities. B) a deduction of $6,000 under financing activities. C) an addition to net income of $6,000 in order to arrive at net cash provided by operating activities. D) a deduction from net income of $6,000 in order to arrive at net cash provided by operating activities.

D) a deduction from net income of $6,000 in order to arrive at net cash provided by operating activities.

A major weakness of static budgets is that: A) they are geared only to a single level of activity. B) they cannot be used to assess whether variable costs are under control. C) they force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity. D) all of the above.

D) all of the above.

Which of the following would be considered a "use" of cash for purposes of constructing a statement of cash flows? A) an increase in accounts payable. B) an increase in accrued liabilities. C) an increase in accumulated depreciation. D) an increase in prepaid expenses.

D) an increase in prepaid expenses.

If Taurus Company converts a short-term note payable into a long-term note payable, this transaction would: A) decrease the current ratio and decrease the acid-test ratio. B) decrease working capital and increase the current ratio. C) decrease working capital and decrease the current ratio. D) increase working capital and increase the current ratio.

D) increase working capital and increase the current ratio.

Sauk Trail Company uses an accounting system that charges costs to the manager who has been delegated the authority to make decisions concerning the costs. For example, if the sales manager accepts a rush order that will result in higher than normal shipping costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as: A) absorption accounting. B) contribution accounting. C) operational budgeting. D) responsibility accounting.

D) responsibility accounting.

A favorable materials price variance indicates that: A) actual quantity exceed standard quantity. B) standard quantity exceed actual quantity. C) actual price exceeded the standard price. D) standard price exceeded the actual price.

D) standard price exceeded the actual price.

Within the relevant range: A) both total variable costs and total fixed costs will remain constant. B) both total variable costs and total fixed costs fluctuate. C) fixed costs per unit will remain constant and variable costs per unit will fluctuate. D) variable costs per unit will remain constant and fixed costs per unit will fluctuate.

D) variable costs per unit will remain constant and fixed costs per unit will fluctuate.

An increase in the discount rate: A) is one method of compensating for reduced risk. B) will have no effect on net present value. C) will increase the present value of future cash flows. D) will reduce the present value of future cash flows.

D) will reduce the present value of future cash flows.

Distinguish between direct and indirect expenses and identify bases for allocating indirect expenses to departments.

Direct expenses are traced to a specific department and are incurred for the sole benefit of that department. Indirect expenses benefit more than one department. Indirect expenses are allocated to departments when computing departmental net income. Ideally, we allocate indirect expenses by using a cause-effect relation for the allocation base. When a cause-effect relation is not identifiable, each indirect expense is allocated on a basis reflecting the relative benefit received by each department.

Conversion costs:

Direct labor and overhead

Record the flow of direct labor costs in process cost accounting.

Direct labor costs are initially debited to the Factory Payroll account. The total amount in it is then assigned to the Goods in Process Inventory account pertaining to each process.

Prepare departmental income statements and contribution reports.

Each profit center (department) is assigned its expenses to yield its own income statement. These costs include its direct expenses and its share of indirect expenses. The departmental income statement lists its revenues and costs of goods sold to determine gross profit. Its operating expenses (direct expenses and its indirect expenses allocated to the department) are deducted from gross profit to yield departmental net income. The departmental contribution report is similar to the departmental income statement in terms of computing the gross profit for each department. Then the direct operating expenses for each department are deducted from gross profit to determine the contribution generated by each department. Indirect operating expenses are deducted in total from the company's combined contribution.

Efficiency Variance

Efficiency variance = (Actual quantity - budgeted quantity) × (standard price or rate)

Ending Inventory

Ending inventory = beginning inventory + purchases - cost of sales

Define and compute equivalent units and explain their use in process cost accounting.

Equivalent units of production measure the activity of a process as the number of units that would be completed in a period if all effort had been applied to units that were started and finished. This measure of production activity is used to compute the cost per equivalent unit and to assign costs to finished goods and goods in process inventory. To compute equivalent units, determine the number of units that would have been finished if all materials (or labor or overhead) had been used to produce units that were started and completed during the period. The costs incurred by a process are divided by its equivalent units to yield cost per unit.

Cost driver:

Factor thought to affect costs

Costs of goods sold = Cost of beginning inventory + Cost of purchases - Cost of ending inventory Beginning + Inputs = Outputs

For manufacturers and retailers, cost of goods sold measures how much the company paid — or will need to pay — for inventory items sold. A retailer's inputs are the cost of the purchases it makes. The outputs are the goods that were sold.

Future value = -Present value x (1 + interest rate)Years

Future value measures how much a present cash flow will be worth in the future. For example, if you put $1,000 into the bank today, earning 6-percent interest a year, how much will you have ten years from now? To solve these problems, many students use tables printed in textbooks or financial calculators. You can also solve these problems using the time value of money formula. Present value measures how much money you receive or pay now. Make this figure positive if you're receiving the money and negative if you're paying the money out. Future value is how much you can expect to receive or pay in the future (again, positive for incoming cash, negative for outgoing cash). The interest rate should be put in as the annual interest rate (rather than daily, monthly, or quarterly). The number of years is for the period of time between the date of the present value and the date of the future value, in years.

Gross Margin

Gross margin = sale price - cost of sales (material and labor)

Income statement formulas:

Gross profit = Net sales - Cost of goods sold Operating profit = Gross profit - Operating expenses Operating or commercial expenses = Selling or marketing expenses + General or administrative expenses Per unit gross profit = Gross profit / No. of units sold Per unit net profit = Net profit / No. of units sold Percentage of GP to sales = (Gross profit / Net sales) × 100 Percentage of net profit to sales = (Net profit / Net sales) × 100

Explain and apply methods of horizontal analysis.

Horizontal analysis is a tool to evaluate changes in data across time. Two important tools of horizontal analysis are comparative statements and trend analysis. Comparative statements show amounts for two or more successive periods, often with changes disclosed in both absolute and percent terms. Trend analysis is used to reveal important changes occurring from one period to the next.

Historical cost:

How much you originally paid for something

Finished goods cost:

How much you paid for goods completed but not yet sold

Work-in-process cost:

How much you paid for goods that are started but not yet completed

Describe trends in managerial accounting.

Important trends in managerial accounting include an increased focus on satisfying customers, the impact of a global economy, and the growing presence of e-commerce and service-based businesses. The lean business model, designed to eliminate waste and satisfy customers, can be useful in responding to recent trends. Concepts such as total quality management, just-in-time production, and the value chain often aid in application of the lean business model.

Explain job cost sheets and how they are used in job order cost accounting.

In a job order cost accounting system, the costs of producing each job are accumulated on a separate job cost sheet. Costs of direct materials, direct labor, and overhead are accumulated separately on the job cost sheet and then added to determine the total cost of a job. Job cost sheets for jobs in process, finished jobs, and jobs sold make up subsidiary records controlled by general ledger accounts.

Key Costs Related to Managerial Accounting

In accounting, a cost measures how much you pay/sacrifice for something. Managerial accounting must give managers accurate cost information relevant to their management decisions.

Overhead:

Indirect materials, indirect labor, and other miscellaneous costs needed to make products

Compute cycle time and cycle efficiency, and explain their importance to production management.

It is important for companies to reduce the time to produce their products and to improve manufacturing efficiency. One measure of that time is cycle time (CT), defined as Process time + Inspection time + Move time + Wait time. Process time is value-added time; the others are non-value-added time. Cycle efficiency (CE) is the ratio of value-added time to total cycle time. If CE is low, management should evaluate its production process to see if it can reduce non-value-added activities.

Apply job order costing in pricing services.

Job order costing can usefully be applied to a service setting. The resulting job cost estimate can then be used to help determine a price for services.

Describe variances and what they reveal about performance.

Management can use variances to monitor and control activities. Total cost variances can be broken into price and quantity variances to direct management's attention to those responsible for quantities used and prices paid.

Explain manufacturing activities and the flow of manufacturing costs.

Manufacturing activities consist of materials, production, and sales activities. The materials activity consists of the purchase and issuance of materials to production. The production activity consists of converting materials into finished goods. At this stage in the process, the materials, labor, and overhead costs have been incurred and the manufacturing statement is prepared. The sales activity consists of selling some or all of finished goods available for sale. At this stage, the cost of goods sold is determined.

Production costs:

Many cost accounting questions relate to production of a physical product (rather than a service). Make sure you're clear on whether the question is asking about units of a product, or an amount of material needed per unit. For example, one bicycle (one unit) requires two wheels. Be clear on which item (units or wheels) you're using when you calculate costs.

Compute materials and labor variances.

Materials and labor variances are due to differences between the actual costs incurred and the budgeted costs. The price (or rate) variance is computed by comparing the actual cost with the flexible budget amount that should have been incurred to acquire the actual quantity of resources. The quantity (or efficiency) variance is computed by comparing the flexible budget amount that should have been incurred to acquire the actual quantity of resources with the flexible budget amount that should have been incurred to acquire the standard quantity of resources.

Record the flow of direct materials costs in process cost accounting.

Materials purchased are debited to a Raw Materials Inventory account. As direct materials are issued to processes, they are separately accumulated in a Goods in Process Inventory account for that process.

Net income = Revenues - Expenses

Net income is called the bottom line because in many ways it's the sum total of accountants' work. To calculate net income, subtract expenses from revenues. Revenues are inflows and other kinds of sales to customers. Expenses are costs associated with making sales. Accountants also sometimes need to add gains or subtract losses in net income; these gains and losses come from miscellaneous events that affect stockholder value, such as selling equipment at a gain or getting your factory destroyed by a mutated prehistoric survivor of the dinosaurs.

Favorable vs. unfavorable variances:

Of course, the word favorable means better or preferred. However, in cost accounting, favorable has a different meaning, depending on whether you're talking about a cost or revenue. Less actual costs than budgeted is a favorable variance. However, more actual revenue than planned is a favorable variance. In both cases, your actual profit is more than planned. Unfavorable variances are the reverse: More actual costs and less actual revenue is unfavorable.

Compute payback period and describe its use.

One way to compare potential investments is to compute and compare their payback periods. The payback period is an estimate of the expected time before the cumulative net cash inflow from the investment equals its initial cost. A payback period analysis fails to reflect risk of the cash flows, differences in the timing of cash flows within the payback period, and cash flows that occur after the payback period.

Explain the role of variable costing in pricing special orders.

Over the short run, fixed production costs such as cost of maintaining plant capacity do not change with changes in production levels. When there is excess capacity, increases in production levels would only increase variable costs. Thus, managers should accept special orders as long as the order price is greater than the variable cost. This is because accepting the special order would increase only variable costs.

Describe and record the flow of overhead costs in job order cost accounting.

Overhead costs are accumulated in the Factory Overhead account that controls the subsidiary factory overhead ledger. Then, using a predetermined overhead rate, overhead costs are charged to jobs.

Distinguish between the plant-wide overhead rate method, the departmental overhead rate method, and the activity-based costing method.

Overhead costs can be assigned to cost objects using a plant-wide rate that combines all overhead costs into a single rate, usually based on direct labor hours, machine hours, or direct labor cost. Multiple departmental overhead rates that include overhead costs traceable to departments are used to allocate overhead based on departmental functions. ABC links overhead costs to activities and assigns overhead based on how much of each activity is required for a product.

Compute overhead variances.

Overhead variances are due to differences between the actual overhead costs incurred and the overhead applied to production. An overhead spending variance arises when the actual amount incurred differs from the budgeted amount of overhead. An overhead efficiency (or volume) variance arises when the flexible overhead budget amount differs from the overhead applied to production. It is important to realize that overhead is assigned using an overhead allocation base, meaning that an efficiency variance (in the case of variable overhead) is a result of the overhead application base being used more or less efficiently than planned.

Break even volume = Fixed costs/Contribution margin cost per unit

Perhaps you recognize contribution margin in the denominator (Sales price - Variable cost per unit), allowing you to further simplify this formula. To figure out the number of units needed to break even, just divide total fixed costs by contribution margin per unit.

Materials:

Physical things you need to make products

Describe the importance and benefits of budgeting and the process of budget administration.

Planning is a management responsibility of critical importance to business success. Budgeting is the process management uses to formalize its plans. Budgeting promotes management analysis and focuses its attention on the future. Budgeting also provides a basis for evaluating performance, serves as a source of motivation, is a means of coordinating activities, and communicates management's plans and instructions to employees. Budgeting is a detailed activity that requires administration. At least three aspects are important: budget committee, budget reporting, and budget timing. A budget committee oversees the budget preparation. The budget period pertains to the time period for which the budget is prepared such as a year or month.

Prepare a statement of cash flows.

Preparation of a statement of cash flows involves five steps: (1) Compute the net increase or decrease in cash; (2) compute net cash provided or used by operating activities (using either the direct or indirect method); (3) compute net cash provided or used by investing activities; (4) compute net cash provided or used by financing activities; and (5) report the beginning and ending cash balance and prove that it is explained by net cash flows. Noncash investing and financing activities are also disclosed.

Price Variance

Price variance = (actual price - budgeted price) × (actual units sold)

Price variance = (Standard price - Actual price) x Actual quantity

Price variance tells you how an unexpected change in the cost of direct materials affects total cost. Use this formula to compute price variance. Standard price is the amount you originally expected to pay, per unit, of direct materials. Actual price is the real price you paid, per unit, for direct materials. The actual quantity is the number of units purchased and used in production. Although the price variance formula focuses on the direct materials variance, you can easily adapt it to figure out the direct labor variance. To do so, replace standard price with the standard cost (per hour) of direct labor. Replace actual price with the actual cost (per hour) of direct labor. Then replace the actual quantity with the actual number of hours worked.

Cost of Goods Manufactured and Sold Statement Formulas:

Prime Cost = Direct Materials Cost + Direct Labor Cost Total Factory Cost or Manufacturing Cost = Direct Materials + Direct Labor Cost + Factory Overhead Conversion Cost = Direct Labor Cost + Factory Overhead Cost Cost of Goods Manufactured (COGM) = Total Factory Cost + Opening Work in Process Inventory - Ending Work in Process Inventory Or Cost of Goods manufactured = Direct materials cost + Direct labor cost + Factory overhead cost + Opening work in process inventory - Ending work in process inventory Cost of goods sold (COGS) = Cost of goods manufactured + Opening finished goods inventory - Ending finished goods inventory Or Cost of goods sold = Direct materials cost + Direct labor cost + Factory overhead cost + Opening work in process inventory - Ending work in process inventory + Opening finished goods inventory - Ending finished goods inventory Number of units manufactured = Units sold + Ending Finished Goods units - Opening finished goods units Per unit cost of goods manufactured = Cost of goods manufactured / Units manufactured Materials used or consumed = Opening inventory or materials + Net purchases of materials - Ending inventory of materials

Compare process cost accounting and job order cost accounting.

Process and job order manufacturing operations are similar in that both combine materials, labor, and factory overhead to produce products or services. They differ in the way they are organized and managed. In job order operations, the job order cost accounting system assigns materials, labor, and overhead to specific jobs. In process operations, the process cost accounting system assigns materials, labor, and overhead to specific processes. The total costs associated with each process are then divided by the number of units passing through that process to get cost per equivalent unit. The costs per equivalent unit for all processes are added to determine the total cost per unit of a product or service.

Explain process operations and the way they differ from job order operations.

Process operations produce large quantities of similar products or services by passing them through a series of processes, or steps, in production. Like job order operations, they combine direct materials, direct labor, and overhead in the operations. Unlike job order operations that assign the responsibility for each job to a manager, process operations assign the responsibility for each process to a manager.

Determine product selling price based on total costs.

Product selling price is estimated using total production and nonproduction costs plus a markup. Price is set to yield management's desired profit for the company.

Break-even Formula

Profit ($0) = sales - variable costs - fixed costs

Define and apply ratio analysis.

Ratio analysis provides clues to and symptoms of underlying conditions. Ratios, properly interpreted, identify areas requiring further investigation. A ratio expresses a mathematical relation between two quantities such as a percent, rate, or proportion. Ratios can be organized into the building blocks of analysis: (1) liquidity and efficiency, (2) solvency, (3) profitability, and (4) market prospects.

Avoiding Pitfalls on Managerial Accounting Exams: Some concepts are easily misunderstood and therefore difficult to address correctly on exams, so:

Read the last sentence first. Management accounting questions often provide a lot of data, but not all of that information is needed to answer the question. Test item writers refer to that data as distractors. If you start at the top and read down, you read a lot of unneeded data. Read the last sentence first. That strategy gets you to what the question is truly asking. Then you can read the rest of the question — and pull out only the data you need to answer the question.

Evaluate short-term managerial decisions using relevant costs.

Relevant costs are useful in making decisions such as to accept additional business, make or buy, and sell as is or process further. For example, the relevant factors in deciding whether to produce and sell additional units of product are incremental costs and incremental revenues from the additional volume.

Relevant range:

Relevant range is a term that relates to machinery, equipment, or vehicles in your business. Think of relevant range as the maximum level of use for the item you operate in your business. Say you use a sewing machine. As long as you operate the machine at or below the relevant range, it should operate normally. The machine's cost should come in at the level you expect. If you operate above the relevant range, the machine won't operate as you expect. You need to invest in a second machine to operate above the relevant range.

Analyze investment centers using profit margin and investment turnover.

Return on investment can also be computed as profit margin times investment turnover. Profit margin (equal to net income/sales) measures the income earned per dollar of sales and investment turnover (equal to sales/assets) measures how efficiently a division uses its assets.

Contribution margin:

Sales less variable costs

Identify relevant costs and apply them to managerial decisions.

Several illustrations apply relevant costs to managerial decisions, such as whether to accept additional business; make or buy; scrap or rework products; sell products or process them further; or eliminate a segment and how to select the best sales mix.

Total fixed costs vs. fixed costs per unit:

Some cost accounting questions provide you with a fixed cost per unit. If you determine that you need fixed costs to answer the question, pause for a minute. Try to find total fixed costs in the question and use that number. Fixed costs per unit should be avoided. That's because, at some point, you sell enough to cover your costs. As a result, the additional units you produce don't have any fixed costs attached to them. Fixed cost per unit is misleading.

Define standard costs and explain how standard cost information is useful for management by exception.

Standard costs are the normal costs that should be incurred to produce a product or perform a service. They should be based on a careful examination of the processes used to produce a product or perform a service as well as the quantities and prices that should be incurred in carrying out those processes. On a performance report, standard costs (which are flexible budget amounts) are compared to actual costs, and the differences are presented as variances. Standard cost accounting provides management information about costs that differ from budgeted (expected) amounts. Performance reports disclose the costs or areas of operations that have significant variances from budgeted amounts. This allows managers to focus attention on the exceptions and less attention on areas proceeding normally.

Describe standards for comparisons in analysis.

Standards for comparisons include (1) intracompany—prior performance and relations between financial items for the company under analysis; (2) competitor—one or more direct competitors of the company; (3) industry—industry statistics; and (4) guidelines (rules of thumb)—general standards developed from past experiences and personal judgments.

Target Net Income

Target net income = sales - variable costs - fixed costs

Explain and illustrate the accounting for production activity using FIFO.

The FIFO method for process costing is applied and illustrated to (1) report the physical flow of units, (2) compute the equivalent units of production, (3) compute the cost per equivalent unit of production, and (4) assign and reconcile costs.

Capulet Company sells a single product. The product has a selling price of $50 per unit and variable expenses of 80% of sales. If the company's fixed expenses total $75,000 per year, then it will have a break-even of: A) $1,875. B) $7,500. C) $93,750. D) $375,000.

The contribution margin (CM) percentage may be calculated as: Sales percentage (100%) minus Variable expenses percentage equals CM percentage 100% - 80% = 20% Then, the break-even point may be calculated as: Fixed costs divided by CM percentage equals break-even point (in sales dollars) $75,000 ÷ 20% = $375,000

Cost of goods sold:

The cost of making goods that you sold

Cost of goods manufactured:

The cost of the goods completed during a period

Graph costs and sales for a single product company.

The costs and sales for a company can be graphically illustrated using a CVP chart. In this chart, the horizontal axis represents the number of units sold and the vertical axis represents dollars of sales or costs. Straight lines are used to depict both costs and sales on the CVP chart.

Record the flow of factory overhead costs in process cost accounting.

The different factory overhead items are first accumulated in the Factory Overhead account and are then allocated, using a predetermined overhead rate, to the different processes. The allocated amount is debited to the Goods in Process Inventory account pertaining to each process.

Quantity variance = Standard price x (Standard quantity - Actual quantity)

The direct materials quantity variance measures how using too much or too little in direct materials affects total costs. Stinginess in using direct materials should decrease your costs. However, wasting direct materials should increase costs. Remember that standard price is how much you originally expected to pay, per unit, of direct materials. Standard quantity is the number of units of direct materials that you expected to use. Actual quantity is the number of units of direct materials that you actually used in production.

Compute cash flows from operating activities using the direct method.

The direct method for reporting net cash provided or used by operating activities lists major operating cash inflows less cash outflows to yield net cash inflow or outflow from operations.

Analyze changes in sales using the degree of operating leverage.

The extent, or relative size, of fixed costs in a company's total cost structure is known as operating leverage. One tool useful in assessing the effect of changes in sales on income is the degree of operating leverage, or DOL. DOL is the ratio of the contribution margin divided by pretax income. This ratio can be used to determine the expected percent change in income given a percent change in sales.

Describe the four types of activities that cause overhead costs.

The four types of activities that cause overhead costs are: (1) unit level activities, (2) batch level activities, (3) product level activities, and (4) facility level activities. Unit level activities are performed on each unit, batch level activities are performed only on each group of units, and product level activities are performed only on each product line. Facility level activities are performed to sustain facility capacity and are not caused by any specific product. Understanding these types of activities can help in applying activity-based costing.

Compute cash flows from operating activities using the indirect method.

The indirect method for reporting net cash provided or used by operating activities starts with net income and then adjusts it for three items: (1) changes in noncash current assets and current liabilities related to operating activities, (2) revenues and expenses not providing or using cash, and (3) gains and losses from investing and financing activities.

Compute internal rate of return and explain its use.

The internal rate of return (IRR) is the discount rate that results in a zero net present value. When the cash flows are equal, we can compute the present value factor corresponding to the IRR by dividing the initial investment by the annual cash flows. We then use the annuity tables to determine the discount rate corresponding to this present value factor.

Explain how balance sheets and income statements for manufacturing and merchandising companies differ.

The main difference is that manufacturers usually carry three inventories on their balance sheets—raw materials, goods in process, and finished goods—instead of one inventory that merchandisers carry. The main difference between income statements of manufacturers and merchandisers is the items making up cost of goods sold. A merchandiser adds beginning merchandise inventory to cost of goods purchased and then subtracts ending merchandise inventory to get cost of goods sold. A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold.

Prepare a manufacturing statement and explain its purpose and links to financial statements.

The manufacturing statement reports computation of cost of goods manufactured for the period. It begins by showing the period's costs for direct materials, direct labor, and overhead and then adjusts these numbers for the beginning and ending inventories of the goods in process to yield cost of goods manufactured.

Budgets that Go into Creating a Master Budget A master budget is a plan created to manage a company's manufacturing and sales activity to meet profit and cash flow goals. Creating a master budget requires careful coordination of several smaller budgets covering all parts of the organization; that way, the master budget is realistic but not complacent.

The master budget contains the following elements: •Sales budget •Production budget •Direct materials budget •Direct labor budget •Manufacturing overhead budget •Selling and administrative budget •Capital acquisitions budget •Cash budget •Budgeted financial statements

Absorption costing vs. variable costing:

The only difference between these two costing methods is how they address fixed manufacturing costs. A typical question on this topic lists variable manufacturing costs, or fixed selling and administrative costs. Don't be fooled! Absorption and variable costing treat these other costs in the same way, so ignore them.

Link both operating and capital expenditures budgets to budgeted financial statements.

The operating budgets, capital expenditures budget, and cash budget contain much of the information to prepare a budgeted income statement for the budget period and a budgeted balance sheet at the end of the budget period. Budgeted financial statements show the expected financial consequences of the planned activities described in the budgets.

Allocate overhead costs to products using the plant-wide overhead rate method.

The plant-wide overhead rate equals total budgeted overhead divided by budgeted plant volume, the latter often measured in direct labor hours or machine hours. This rate multiplied by the number of direct labor hours (or machine hours) required for each product provides the overhead assigned to each product.

Explain the purpose and identify the building blocks of analysis.

The purpose of financial statement analysis is to help users make better business decisions. Internal users want information to improve company efficiency and effectiveness in providing products and services. External users want information to make better and more informed decisions in pursuing their goals. The common goals of all users are to evaluate a company's (1) past and current performance, (2) current financial position, and (3) future performance and risk. Financial statement analysis focuses on four "building blocks" of analysis: (1) liquidity and efficiency—ability to meet short-term obligations and efficiently generate revenues; (2) solvency—ability to generate future revenues and meet long-term obligations; (3) profitability—ability to provide financial rewards sufficient to attract and retain financing; and (4) market prospects—ability to generate positive market expectations.

Explain the purpose and nature of, and the role of ethics in, managerial accounting.

The purpose of managerial accounting is to provide useful information to management and other internal decision makers. It does this by collecting, managing, and reporting both monetary and nonmonetary information in a manner useful to internal users. Major characteristics of managerial accounting include (1) focus on internal decision makers, (2) emphasis on planning and control, (3) flexibility, (4) timeliness, (5) reliance on forecasts and estimates, (6) focus on segments and projects, and (7) reporting both monetary and nonmonetary information. Ethics are beliefs that distinguish right from wrong. Ethics can be important in reducing fraud in business operations.

Distinguish between operating, investing, and financing activities, and describe how noncash investing and financing activities are disclosed.

The purpose of the statement of cash flows is to report major cash receipts and cash payments relating to operating, investing, or financing activities. Operating activities include transactions and events that determine net income. Investing activities include transactions and events that mainly affect long-term assets. Financing activities include transactions and events that mainly affect long-term liabilities and equity. Noncash investing and financing activities must be disclosed in either a note or a separate schedule to the statement of cash flows. Examples are the retirement of debt by issuing equity and the exchange of a note payable for plant assets.

Prepare each component of a master budget and link each to the budgeting process.

The term master budget refers to a collection of individual component budgets. Each component budget is designed to guide persons responsible for activities covered by that component. A master budget must reflect the components of a company and their interaction in pursuit of company goals.

Prepare and analyze an income statement using absorption costing and using variable costing.

The variable costing income statement differs from the absorption costing income statement in that it classifies expenses based on cost behavior rather than function. Instead of gross margin, the variable costing income statement shows contribution margin. This contribution margin format focuses attention on the relation between costs and sales that is not evident from the absorption costing format. Under absorption costing, some fixed overhead cost is allocated to ending inventory and is carried on the balance sheet to the next period. However, all fixed costs are expensed in the period incurred under variable costing. Consequently, absorption costing income is generally greater than variable costing income if units produced exceed units sold, and conversely.

Inventoriable costs:

These are costs that are directly related to the product. Production costs are inventoriable costs for a manufacturer. If you are a retailer, your cost to purchase inventory is also an inventoriable. Other costs you incur for goods are included, such as shipping and storage costs.

Net income = (Contribution margin x Volume) - Fixed costs

This formula lets you further simplify the CVP formula.

Job costing:

This method of costing assumes that every customer job is different. Plumbers and carpenters are good examples of businesses that use cost accounting. Because every job is different, each customer job is assigned material, labor, and overhead costs.

Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs.

Three different methods used to estimate costs are the scatter diagram, the high-low method, and least-squares regression. All three methods use past data to estimate costs. Cost estimates from a scatter diagram are based on a visual fit of the cost line. Estimates from the high-low method are based only on costs corresponding to the lowest and highest sales. The least-squares regression method is a statistical technique and uses all data points.

Contribution margin per unit = Sales price - Variable cost per unit

To compute contribution margin per unit, divide the total contribution margin by the number of units sold. Alternatively, you can calculate sales price less variable cost per unit.

Contribution margin ratio = Total contribution margin/Total sales Contribution margin ratio = Contribution margin per unit/Sales price per unit

To compute contribution margin ratio, divide contribution margin by sales, either in total or per unit.

Analyze the statement of cash flows and apply the cash flow on total assets ratio.

To understand and predict cash flows, users stress identification of the sources and uses of cash flows by operating, investing, and financing activities. Emphasis is on operating cash flows since they derive from continuing operations. The cash flow on total assets ratio is defined as operating cash flows divided by average total assets. Analysis of current and past values for this ratio can reflect a company's ability to yield regular and positive cash flows. It is also viewed as a measure of earnings quality.

Describe the selection of a hurdle rate for an investment.

Top management should select the hurdle (discount) rate to use in evaluating capital investments. The required hurdle rate should be at least higher than the interest rate on money borrowed because the return on an investment must cover the interest and provide an additional profit to reward the company for risk.

Explain transfer pricing and methods to set transfer prices.

Transfer prices are used to record transfers of items between divisions of the same company. Transfer prices can be based on costs or market prices, or can be negotiated by division managers.

Describe how absorption costing can result in over-production.

Under absorption costing, fixed overhead costs are allocated to all units including both units sold and units in ending inventory. Consequently, expenses associated with the fixed overhead allocated to ending inventory are deferred to a future period. As a result, the larger ending inventory is, the more overhead cost is deferred to the future, and the greater current period income is.

Prepare a contribution margin report.

Under variable costing, the total variable costs are first deducted from sales to arrive at contribution margin. Variable costs and contribution margin are also shown as ratios (after dividing by dollar sales).

Net income = (Sales price x Volume) - Total cost

Variable cost per unit is the additional cost of producing a single unit. Volume is the number of units produced. Fixed cost is the total fixed cost for the period. Net income is just the difference between total sales and total cost.

Convert income under variable costing to the absorption cost basis.

Variable costing income can be adjusted to absorption costing income by adding the fixed cost allocated to ending inventory and subtracting the fixed cost previously allocated to beginning inventory.

Variable Overhead Variance

Variable overhead variance = spending variance + efficiency variance

Describe and apply methods of vertical analysis.

Vertical analysis is a tool to evaluate each financial statement item or group of items in terms of a base amount. Two tools of vertical analysis are common-size statements and graphical analyses. Each item in common-size statements is expressed as a percent of a base amount. For the balance sheet, the base amount is usually total assets, and for the income statement, it is usually sales.

Describe accounting concepts useful in classifying costs.

We can classify costs on the basis of their (1) behavior—fixed vs. variable, (2) traceability—direct vs. indirect, (3) controllability—controllable vs. uncontrollable, (4) relevance—sunk vs. out of pocket, and (5) function—product vs. period. A cost can be classified in more than one way, depending on the purpose for which the cost is being determined. These classifications help us understand cost patterns, analyze performance, and plan operations.

Prepare journal entries for standard costs and account for price and quantity variances.

When a company records standard costs in its accounts, the standard costs of materials, labor, and overhead are debited to the Goods in Process Inventory account. Based on an analysis of the material, labor, and overhead costs, each quantity variance, price variance, volume variance, and controllable variance is recorded in a separate account. At period-end, if the variances are material, they are allocated among the balances of the Goods in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts. If they are not material, they are simply debited or credited to the Cost of Goods Sold account.

Allocate overhead costs to products using the departmental overhead rate method.

When using multiple departmental rates, overhead cost must first be traced to each department and then divided by the measure of output for that department to yield the departmental overhead rate. Overhead is applied to products using this rate as products pass through each department.

Explain cost flows for activity-based costing.

With ABC, overhead costs are first traced to the activities that cause them, and then cost pools are formed combining costs caused by the same activity. Overhead rates based on these activities are then used to assign overhead to products in proportion to the amount of activity required to produce them.

Allocate overhead costs to products using activity-based costing.

With ABC, overhead costs are matched to activities that cause them. If there is more than one cost with the same activity, these costs are combined into pools. An overhead rate for each pool is determined by dividing total cost for that pool by its activity measure. Overhead costs are assigned to products by multiplying the ABC pool rate by the amount of the activity required for each product.

Labor:

Work needed to make products

Cost-Volume-Profit Relationships for Managerial Accounting: Managerial accounting provides useful tools, such as cost-volume-profit relationships, to aid decision-making. Cost-volume-profit analysis helps you understand different ways to meet your company's net income goals. This image describes the relationship among sales, fixed costs, variable costs, and net income:

http://media.wiley.com/Lux/97/354897.image0.jpg •The bottom axis indicates the level of production — the number of units you make. •The left axis indicates value in dollars. •Where total sales equals total costs, the company breaks even (which is why that's called the break-even point). •The shaded area to the upper right of this break-even point is profit. •The shaded region to the lower left is net loss. •Total variable costs are a diagonal line because the higher the production, the greater the variable costs. •The total fixed costs line is horizontal because regardless of the production level, fixed costs stay the same. •Total costs equal the sum of total variable costs and total fixed costs.