A200 - Managerial Exam

how do you calculate the break even point in sales dollars?

# of units at breakeven * selling price per unit

calculation for: gross margin

(FINISH)

what are the advantages of participative budgeting

(budgeting is ver time consuming; employees at all levels of the org should be involved in budgeting (bottom up and top down)) - lower level employees may have more realistic goals and resulting in more accurate budgets. their involvement fosters an atmosphere of "team effort" - upper-management ensures budget is consistent with company goals. their involvement can prevent "slack" in the budget

how do you calculate the break even point in number of units?

(fixed costs + target profit)/ CM per unit

identify, classify, and give examples of: manufacturing overhead (MOH) including indirect costs

* costs that are not easily traced to specific products (indirect costs) indirect materials: glue, nails, paper, oil - used in production process but won't appear in finished product indirect labor - production supervisors, inspectors, maintenance personnel factory costs: rental costs for manufacturing facilities and equipment, utility costs, depreciation costs, security, cost of preparing equipment for manufacturing costs/ setup costs, maintenance costs for the manufacturing facility and equipment

what qualitative considerations affect the special order decision

- company's regular customers might demand reduced prices - special order prices do not apply to repeat business - at full capacity company should reject any special order because it reduces its ability to satisfy full-price customers

what are the important qualitative considerations for segment elimination decisions?

- employees lives will be disrupted - sales of different product lines are frequently interdependent - what will happen to the space freed by the eliminated segment? - volume changes can affect elimination decisions

what qualitative considerations affect the decision to outsource

- outsourcing reduces the company's level of control, giving some of the control to outside suppliers - the reliability of the supplier is critical to an outsourcing decision

what are the two primary characteristics of relevant info?

1. differs among the alternatives 2. is future oriented

how do you classify these costs: 1. fixed? 2. variable? 3. mixed?

1. fixed: costs that do not change in TOTAL, regardless of changes in the related activity or volume (rent) 2. variable - costs that DO change in TOTAL, proportionately, to changes in activity or volume (cheese) 3. Mixed - costs (have elements of fixed and variable costs) --> manager's compensation (salary plus bonus)

how do companies use product costs for preparing financial statements and decision - making

1. planning (how many units should we produce? how much should we budget for salaries or utilities? how many items can we sell?) 2. Control evaluating outcomes (did things happen the way we thought they would) 3. decision-making - choosing between alternatives (work shifts, store hours, daily goals)

what are the advantages of budgeting

1. planning: the budget formalies and documents managerial plans 2. coordination: the budgeting process forces coordination among departments to promote decisions in the best interest of the company as a whole 3. performance measurement: comparing actual results to budget expectations provides a way to evaluate performance (budget v. actual) 4. corrective action: budgeting provides advance notices of potential shortages, bottlenecks or other weaknesses in operating plans

what are the three levels of planning for business activity

1. strategic planning (general): involves making long-term (>5 years) decisions such as defining the scope of the business, determining which products to develop or discontinue, and identifying the most profitable markets 2. capital budgeting (general): focuses on intermediate-range (3-5 years) planning and involves decisions such as whether to buy or lease equipment, whether to stimulate sales or whether to increase company asset base (what do they need) 3. operations budgeting (detailed): concentrates on short-term (next year's) plans. a key component is the master budget

what are the 4 hierarchical levels of cost classification

1. unit level: costs incurred each time a company generates one unity of product 2. batch level: many products are generated in batches rather than individual units. for instance, an individual student-athlete's scholarship is a unit-level cost, but the cost of the team bus is a batch-level cost 3. product level: costs incurred to support specific products or services are called product-level costs 4. facility level: are incurred to support the entire facility/company

calculation for: ending inventory balances

Beg WIP inventory +DM used +DL +Manufacturing OH assigned =Total manufacturing costs - COGM =Ending WIP

calculation for: cost of goods manufactured

Beg WIP inventory +DM used +DL +Manufacturing OH assigned =Total manufacturing costs -End WIP =COGM

calculation for: cost of goods sold

FINISH

identify and/or provide examples of these categories of costs for manufacturing companies: Downstream costs

Marketing, distribution, customer service *period costs incurred after production or not related to production

what is the effect of activity on fixed costs:

Per unit: FC per unit changes inversely when activity levels change total: does not change when activity levels change

What is the effect of activity on variable costs:

Per unit: does not change when activity levels change total: changes in proportion to changes in activity level

calculation for: current period manufacturing costs

RM used + DL used + MOH costs assigned = total manufacturing costs

Identify and understand the different inventory accounts for manufacturing companies: work in process inventory

Raw materials --> work in process Cost of materials available for use --> materials used, labor, overhead ----> total manufacturings costs incurred this period ---> ending work in process inventoryo (partially completed inventory)

Contribution Margin Format

Revenue - variable costs = Contribution Margin - fixed costs = operating income

how do you calculate the Gross margin subtotal?

Revenues - COGS = GM

NOTE: under GAAP and contribution margin, net income...

SHOULD BE THE SAME

(Contribution margin approach) calculation for TOTAL contribution margin

TOTAL revenue - TOTAL variable costs = TOTAL contribution margin

How are product costs recorded until inventory is sold?

They are recorded as ASSETS (aka "capitalizing" the costs)

how does a company decide to accept or reject a special-order?

a company decides to accept or reject a special-order by quantitative and qualitative analysis

what is a period cost?

a cost recorded as an expense in the period in which they are incurred

what is the importance of qualitative analysis when making a decision?

a qualitative focus considers non-quantitative aspects such as the impact on people and attractiveness of the products

what is the importance of quantitative analysis when making a decision?

a quantitative focus considers the cost, increase in profits, or other numerical aspects of the decision

When are period costs reported?

after gross margin and before the subtotal operating income (revenues - COGS = gross margin - operating expenses = Operating income)

why do companies need to know the margin of safety?

answers very important question: if budgeted revenues are above the break-even point, how far can the fall before we reach the break even point and begin losing money?

note: facility level and corporate level costs...

are almost always unavoidable costs (they are fixed and do not change)

NOTE: period and product costs can classified...

as both fixed AND variable costs

why is eliminating an unprofitable segment not always the correct decision?

because eliminating a segment might increase overall costs more than eliminate it

how are manufacturing costs recorded in the accounting records?

beg balance sheet: raw materials inv, work in process inv, finished goods inv income statement: COGS end balance sheet: raw materials inv, work in process inv, finishged goods inv

how can companies increase net income?

better marketing,

calculation for margin of safety:

budgeted sales - break even sales = margin of safety in dollars

how do managers affect profitability by applying operating leverage?

business managers apply operating leverage to magnify small changes in revenue into dramatic changes in profitability --> ie. the lever managers use to achieve disproportionate changes between revenue and profitability is a fixed cost. (*** Small changes in revenue and NO changes in fixed cost --> results in a disproportionate increase in profit)

why is capacity a consideration in the special-order decision?

capacity is a consideration because if the company does not have excess ability/capacity to accept the special order without displacing regular orders

how do opportunity costs impact the decision to outsource?

consider opportunity costs- could current machinery/assets used in production be leased or bring in other income

Which format is used in managerial accounting: GAAP or Contribution Margin?

contribution margin

Identify and understand the different inventory accounts for manufacturing companies: raw materials inventory

cost of materials available --> ending raw mateirals inventory (unused materials)

def of non-relevant costs (and avoidable v. unavoidable costs)

def of avoidable: the costs managers can eliminate, or reduce, by making specific choice. *they are a subset of relevant costs def of unavoidable/non-relevant: the cost of the director of the athletic program is not avoidable thus it is not relevant to the elimination decisions

Definition of sunk cost w/ example

def: a cost incurred (spent) in a past transaction and cannot be changed. Sunk costs are not relevant for making current decisions. ex: the cost of equipment already purchased and used in the sport

what is a master budget? what are its components?

def: a group of detailed budgets and schedules representing the company's operating and financial plans components: operating budgets, capital budgets, pro forma financial statements

what are segments and what is the decision being made?

def: business frequently organize their operations into subcomponents decision: segment reports can be prepared for products, services, departments, branches, centers, offices, or division - the primary objective of segment analysis is to determine whether relevant revenues exceed relevant costs

what is outsourcing? (know the decision being made w/ outsourcing decisions)

def: buying goods and services from other companies rather than producing them internally **companies can sometimes purchase products needed in the manufacturing process for less than it would cost to make them

def of differential/relevant revenue

def: costs that can be either fixed or variable/period or product costs that are independent from the concept of cost behavior and duffers among alternatives ex: if IU is considering eliminating one of their varsity sports that generates $100,000 in ticket revenue --> this ticket revenue is differential (relevant) revenue because IU's total athletic revenue would be different if the sport was eliminated

what is the margin of safety?

def: measures the cushion between budgeted sales and the break-even point. it quantifies the amount by which actual sales can fall short of expectations before the company will begin to incur losses

what is a special-order decision?

def: occasionally, a company receives an offer to sell its product at a price significantly below its normal selling price

what is the relevant range and how does it affect fixed and variable costs?

def: range of activity over which the definitions of fixed and variable costs are valid fixed: if pizza y agreed to pay the driver $60/shift. but the driver can only handle 20 deliveries. what if demand is significantly more than 20? in that case, pizza Y might need multiple driers or a larger delivery vehicle. that would cause the fixed delivery cost to change -- relevant range? 0-20 deliveries @ the cost of $60/shift variable: suppose pizza Y orders custom cups at a cost of 10 cents each, however if they order more than 1000 cups they get a discount and the cost drops to 0 cents per cup. -- relevant range? 0 - 1000 cups at a cost of 10 cents per cup

what is the activity base and how does it affect cost classification?

def: the factor that causes changes in variable cost affect: paying the delivery driver $60/shift is a fixed cost for each shift. however, if the company needs a delivery driver at each store, the total cost changes depending on the number of stores --> therefore -- the delivery cost is a fixed cost per store, but the cost for multiple stores is a variable cost.

what is the need and purpose of budgeting

def: the quantitative expression of a proposed plan of action need/purpose: a budget coordinates what needs to be done to implement the plan -- includes both financial and nonfinancial aspects -- serves as a road map for the company to follow

definition of opportunity cost and example

def: the sacrifice (something given up) that is incurred to choose an alternative opportunity. think of an opportunity cost as more of "lost" revenue, not an actual "cost" ex: if the university could rent out the practice facility used by the sport, the amount of rent is an opportunity cost of keeping the sport (ie: lost revenue)

identify and/or provide examples of these categories of costs for manufacturing companies: midstream costs

direct materials, direct labor, MOH *product costs

hint: corporate allocated costs (facility costs) and sunk costs are not...

eliminated when a segment is eliminated

What is the time horizon and reporting frequency of financial v. managerial?

financial: - time horizon: past only, historically based -reporting frequency: delayed with emphasis on annual reports managerial: - time horizon: past, present, and future - reporting frequency: continuous reporting

what is the relationship between the type of user and type of information of financial v. managerial?

financial: - users: outsiders (creditors, investors, gov't agencies, analysts, reporters) - info type: financial - info characteristics: factual info that is characterized by objectivity, reliability, consistency, and accuracy managerial: - users: insiders (exec, managers, operators) - info type: non-financial info - info characteristics: estimates that promote relevance and enable timeliness

what's the difference between financial acctg and managerial acctg?

financial: - users: outsiders (creditors, investors, gov't agencies, analysts, reporters) - info type: financial -level of aggregation: global info on the company as a whole - info characteristics: factual info that is characterized by objectivity, reliability, consistency, and accuracy - time horizon: past only, historically based -reporting frequency: delayed with emphasis on annual reports managerial: - users: insiders (exec, managers, operators) - info type: non-financial info - level of aggregation: local info on subunits of the organization - info characteristics: estimates that promote relevance and enable timeliness - time horizon: past, present, and future - reporting frequency: continuous reporting

what are the different regulations of financial v. managerial

financial: regulation by SEC, FASB, and other determiners of GAAP managerial: no regulation, limited only be the value-added principle

which costs are riskier but also can provide huge rewards (Fixed or variable)?

fixed costs (shifting the cost structure from fixed to variable reduces not only the level of risk but also the potential for profits

how are: fixed, variable and mixed...affected by activity/production

fixed: - total: when activity increases/decreases --> remains constant - per unit: when activity increases --> decreases; when activity decreases --> increases ** the cost per unit of a fixed cost varies INVERSELY with changes in the level of activity variable: - total: when activity increases --> increases proportionately; when activity decreases --> decreases proportionately - per unit: when activity increases/decreases --> remains constant ** total variable cost increases or decreases proportionatey with changes in the volume of activity; cost per unit stays the same

Identify, classify and give examples of period costs:

general, selling and administrative expenses (SG&A), interest expense, income taxes expense *these costs are NOT recorded in the inventory account *period costs are expensed immediately on the income statement

how many items must be sold to achieve a target profit amount?

however many items exceed breakeven

how do opportunity costs impact the decision to accept or reject a special-order?

if revenue greatly decreases or if other options provide more money

what is the effect on net income from selling one or more items beyond the breakeven point.

increase in profit

what is "Just-in-time" inventory?

inventory that is received from suppliers only as they are needed (objective is to reduce inventory holding costs, and increase inventory turnover)

What is recorded in the inventory account v. the operating expenses accounts: up, mid, down?

inventory: midstream operating: upstream and downstream

NOTE: if a cost is misclassified...

it can affect the calculation of gross margin and possibly net income

is opportunity cost really a cost

no - it's potential lost revenue

what costs are not included in the inventory account

period costs - they are expensed IMMEDIATELY

what are the uses of managerial accounting?

planning, control evaluating outcomes, decision making (choosing between alternatives)

what costs go into the inventory account?

product Costs: - direct materials/raw materials - direct labor -MOH

what's the difference between when product and period costs affect the net income?

product cost: delayed period: immediate

what's the difference between how product and period costs affect the net income?

product cost: does not affect income statement until product has been sold and becomes part of COGS period: immediately expensed onto income statement and net income

should managers base their asset replacement decisions on profitability analysis or physical deterioration?

profitability analysis Steps: 1. determine what relevant costs the company will incur if it keeps the old asset/machine -- original costs, accumulated depreciation are sunk costs (irrelevant) -- market value of an old asset is an opportunity cost. salvage value reduces opportunity cost -- operating costs 2. determine what relevant costs the company will incur if it purchases and uses the new asset/machine -- cost of the new machine. salvage value of the new machine reduces cost to purchase -- operating costs **this analysis ignores income tax effects and the time value of money

Identify and understand the different inventory accounts for manufacturing companies: finished goods inventory

raw materials --> work in process --> finished goods cost of materials available for use --> materials used, labor, overhead ---> total manufacturing costs incurred this period ---> cost of goods manufactured ---> ending finished goods inventory (unsold products)

understand the flow of manufacturing costs

raw materials --> work in process --> finished goods --> Cost of goods sold (COGS) beg RM inventory + materials purchased = RM available - RM used = ending RM inventory Beg WIP inventory: RM used + DL Used + MOH costs assigned = total manufacturing costs - Cost of goods manufactured/completed (this period) = ending WIP Inventory beg FG inventory + Cost of Goods manufactured = cost of goods available for sale - COGS = ending FG inventory

identify and/or provide examples of these categories of costs for manufacturing companies: Upstream costs

research and development (r&D), product design *period costs incurred before production

GAAP Format:

revenue - COGS = GM - operating expenses = Operating Income +/- Other Items = operating Income

What is meant by the phrase: "fixed costs represents a commitment to an economic sacrifices?

risk refers to the possibility that sacrifices may exceed benefits fixed costs represent the ultimate risk of undertaking a particular business project

(Contribution margin approach) Calculation for Contribution MARGIN PER UNIT

selling price per unit - variable cost per unit = contribution margin per unit

is inventory an important asset for these types of companies: 1. Service 2. merchandising 3. manufacturing companies

service: no - usually do not have inventory. they sell a service (therefore no product costs) - def: provide services to customers merchandising: yes/no --> product cost is the price paid to others to buy inventory. (payroll, rent, and other costs are treated as period expenses - not added to the inventory account) - Def: buy goods that are sold to customers or other companies Manufacturing: YES YES YES --> product costs include materials, labor, and MOH - Def: make the goods they sell to their customers

what are the 3 steps of quantitative analysis involved in segment elimination decision making?

steps: 1. determine the amount of relevant (differential) revenue that pertains to eliminating the division 2. determine the amount of cost the company can avoid if it eliminates the division 3. if the relevant revenue is less than the avoidable cost eliminate the segment (division) - if not continue to operate it

what are the 3 steps of quantitative analysis involved in special-order decision making?

steps: 1. determine the amount of the relevant (differential) revenue the company will earn by accepting the special order 2. determine the amount of the relevant (differential) cost the company will incur by accepting the special order 3. accept the special order if the relevant revenue exceeds the relevant (avoidable) cost. reject the order if relevant cost exceeds relevant revenue

what does the 2-step quantitative analysis process look like for outsourcing decisions?

steps: 1. determine the production costs the company can avoid if it outsources production 2. compare the avoidable (relevant) production costs with the cost of buying the product and select the lower-cost option

identify, classify, and give examples of: direct labor

the cost of wages paid to factory workers involve din hands-on contact with the products being manufactured

what does it mean to "hold" inventory?

the practice of stocking inventory your business does not need immediately (try to prevent potential stockouts)

how do companies use product costs for decision-making?

they use it for: - cost-plus pricing: a common business practice - control business operations and expenses

NOTE: The contribution margin is the amount of revenue available after subtracting variable costs...

to cover fixed expenses and then provide profits

how do the various Costs (up/mid/down) affect the balance sheet?

up and down: cash and RE midstream: assets/inventory

how do the various Costs (up/mid/down) affect the income statement

up and down: immediately included as an expense midstream: won't affect until it is sold (COGS)

when should a company accept a special-order?

when relevant revenue exceeds relevant costs

what is the asset replacement decision based on?

whether to keep the machine or acquire a new one is completely based on which has a lower total relevant cost

identify, classify, and give examples of: direct materials

woods, metals, manufactured parts, engines, glass, traced to specific products