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6,000 (30 units × $200 per unit) = $6,000

Activity Cost Pool | Activity Measure | Activity Rate Animation concept | Number of proposals | $6,040 per proposal Animation production | Minutes of completed animation | $7,725 per minute Contract administration | Number of contracts | $6,800 per contract Activity Measure | Local commercials Number of proposals | 25 Minutes of completed animation | 5 Number of contracts | 10 Total sales from the 10 contracts for local commercials was $180,000 1.Calculate the cost of serving the local commercial market. 2. Calculate the margin earned serving the local commercial market (assuming total sales for 10 contracts was $180,000). 3. What would you recommend to management concerning the local commercial market?

6040 * 25 = 151,000 7,725 * 5- 38,625 6,800 * 10 = 68,000 Cost of serving the local market: 257,625 Sales revenue: 180,000 Costs: Animation concept: 151,000 (lhs) Animation production: 38,625 (lhs) Contract administration: 68,000 (lhs) Total costs: 257,625 (rhs) Net margin (loss): -77,625 (rhs)

What is a mixed cost?

A cost that includes both a fixed portion and a variable portion

What is Absorption costing?

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

What is normal costing?

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job.

What is job order costing?

A costing system used in situations where many different products, jobs, or services are produced each period.

What is an allocation base? When do we use it?

A measure of activity such as direct labor-hours, direct labor dollars or machine-hours that is used to assign costs to cost objects. a. It is impossible or difficult to trace overhead costs to particular jobs. b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary. c. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

What is an Activity Base (Cost Driver)? List some activity bases.

A measure of what causes the incurrence of a variable cost: •Units produced •Machine hours •Miles driven •Labor hours

What is activity-based costing?

A method of cost accounting designed to identify streams of activities and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities.

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage? a. 2.21. b. 0.45. c. 0.34. d. 2.92.

A. Operating leverage formula: Contribution Margin / Operating Income $2,373 / $1,073 = 2.21

Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don't want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.

A. Answer: Yes, the cost of the train ticket is relevant.

Greenwood Coffee is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $3.79, and the average variable expense per cup is $0.94. The average fixed expense per month is $1,800. Use the formula method to determine the sales dollars that must be generated to attain a target profit of $2,500 per month.

Sales$ to attain target profit = Target profit+ Fixed expenses / CM ratio = $2,500 + $1,800 / 0.752 = $5,718

Dickson Company has two production departments, Milling and Assembly. The company uses a job-order costing system and computes a predetermined overhead rate in each production department. The predetermined overhead rate in the Milling Department is based on machine-hours and in the Assembly Department it is based on direct labor-hours. The company uses cost-plus pricing (and a markup percentage of 75% of total manufacturing cost) to establish selling prices for all its jobs. At the beginning of the year, the company made the following estimates: Department of Milling: Machine-hours: 60,000 Direct labor-hours: 8,000 Total fixed manufacturing overhead cost: $390,000 Variable manufacturing overhead per machine-hour: $2.00 Variable manufacturing overhead per direct labor-hour: - Department of Assembly: Machine-hours: 3,000 Direct labor-hours: 80,000 Total fixed manufacturing overhead cost: $500,000 Variable manufacturing overhead per machine-hour: - Variable manufacturing overhead per direct labor-hour: $3.75 Job 407 Milling Department | Assembly Department Machine-hours: 90 | 4 Direct labor-hours: 5 | 20 Direct materials: $800 | $370 Direct labor cost: $70 | $280

Step 1: Milling Department = $390,000 + ($2.00 per MH ×60,000 MHs) = $510,000 Assembly Department = $500,000 + ($3.75 per DLH ×80,000 DLHs) = $800,000 Step 2: Milling Department = $510,000 ÷ 60,000 MHs = $8.50 per MH Assembly Department = $800,000 ÷ 80,000 DLHs = $10.00 per DLH Step 3: Milling Department = 90 MHs×$8.50 per MH = $765 Assembly Department = 20 DLHs×$10 per DLH = $200 Step 4: Milling | Assembly MOH Applied: 765 | 200= 965 Direct materials: $800 | $370= 1,170 Direct labor cost: $70 | $280= 350 Total: 2,485 Step 5: Total cost of Job 407= $2,485.00 Markup ($2,485 × 75%)= 1,863.75 Selling price of Job 407= $4,348.75

Target Profit Analysis Formula Method

unit sales to attain the target profit = (target profit + fixed expenses) / CM per unit

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 If RBC has an opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses, what price would it quote to the wholesaler if it wants to increase monthly profits by $3,000?

$ 3000 ÷ 150 bikes = $ 20 per bike Variable cost per bike = 300 per bike Selling price required = $ 320 per bike --------- 150 bikes × $320 per bike = $ 48,000 Total variable costs = 45,000 Increase in net operating income = $ 3,000

$200 Profit = (Sales - VE) - FE Profit = ($200,500 − $120,300) − $80,000 $200 = ($200,500 − $120,300) − $80,000

Characteristics of a Successful ABC Implementation

- strong top management support - linked to how people are evaluated and rewarded - cross functional teams should be created

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 With an operating leverage of 5, if RBC increases its sales by 10%, net operating income would increase by 50%.

10% increase in sales from $250,000 to $275,000, results in a 50% increase in income from $20,000 to $30,000. Increased sales 550 Total Sales (500 bicycles): $ 275,000 Less: Variable expenses: 165,000 Contribution margin: 110,000 Less: Fixed expenses: 80,000 Net operating income: $ 30,000

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials $6.00 Direct labor $3.50 Variable manufacturing overhead $1.50 Fixed manufacturing overhead $4.00 Fixed selling expense $3.00 Fixed administrative expense $2.00 Sales commissions $ 1.00 Variable administrative expense $0.50 1. If 8,000 units were produced and sold, what is the total amount of variable cost related to the units produced and sold? 2. If 12,500 units were produced and sold, what is the total amount of variable cost related to the units produced and sold? 3. If 8,000 units were produced and sold, what is the average fixed manufacturing cost per unit produced? 4. If 12,500 units were produced and sold, what is the average fixed manufacturing cost per unit produced?

1). 12.50 * 8000 = 100,000 2). 12,500 * 12.50= 156,250 3). 4 * 10,000 / (8,000) = 5 4). 4 * 10,000 / (12,500) = 3.2

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials $6.00 Direct labor $3.50 Variable manufacturing overhead $1.50 Fixed manufacturing overhead $4.00 Fixed selling expense $3.00 Fixed administrative expense $2.00 Sales commissions $ 1.00 Variable administrative expense $0.50 1. If the selling price is $22 per unit, what is the contribution margin per unit? 2. If 11,000 units are produced, what are the total amounts of direct and indirect manufacturing costs incurred to support this level of production? 3. What incremental manufacturing cost will Martinez incur if it increases production from 10,000 to 10,001 units?

1). 22 - 12.50: 9.5 2). DM: 6 * 12,000= 72,000 DL: 3.50 * 12,000: 42,000 VMOH: 1.5 * 12,000= 18,000 FMOH: 4 * 12,000= 48,000 Total amount of product costs: 180,000 3). DM + DL + VMOH: 11

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials $6.00 Direct labor $3.50 Variable manufacturing overhead $1.50 Fixed manufacturing overhead $4.00 Fixed selling expense $3.00 Fixed administrative expense $2.00 Sales commissions $ 1.00 Variable administrative expense $0.50 1. If 8,000 units were produced, what is the total amount of fixed manufacturing cost incurred to support this level of production? 2. If 12,500 units were produced, what is the total amount of fixed manufacturing cost incurred to support this level of production? 3. If 8,000 units are produced, what is the total amount of manufacturing overhead cost incurred to support this level of production? What is this total amount expressed on a per unit basis? 4. If 12,500 units are produced, what is the total amount of manufacturing overhead cost incurred to support this level of production? What is this total amount expressed on a per unit basis?

1). 5 * 8000 = 40,000 2). 3.2 * 12,500 = 40,000 3). 1.50 * 8,000 = 12,000 + 40,000 / (8,000): 6.5 4). 1.5 * 12,500 = 18750 / 40,000 / (12,500): 4.7

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces 10,000 units, its average costs per unit are as follows: Average Cost per Unit Direct materials $6.00 Direct labor $3.50 Variable manufacturing overhead $1.50 Fixed manufacturing overhead $4.00 Fixed selling expense $3.00 Fixed administrative expense $2.00 Sales commissions $ 1.00 Variable administrative expense $0.50 1. What is the total amount of product costs incurred to make 10,000 units? 2. What is the total amount of period costs incurred to sell 10,000 units? 3. If 8,000 units were produced and sold, what is the variable cost per unit produced and sold? 4. If 12,500 units were produced and sold, what is the variable cost per unit produced and sold?

1). Direct materials: 6.0 * 10,000= 60,000 Direct labor: 3.50 * 10,000 =35,000 VMOH: 1.5*10,000 = 15000 FMOH: 4* 10,000= 40,000 Total amount of product cost: 150,000 2). Total amount of period cost Fixed selling expense: 3.00* 10,000 =30,000 Fixed administrative exp: 2.00*10,000= 20,000 Sales commission: 1.00*10,000= 10,000 Variable adm expense: 0.5*10,000= 5000 total amount of period cost: 65000 3). 12.50 4). 12.50

1. What happens when DM are used in production? 2. What is added to WIP to convert DM into finished goods? 3. Once a unit of product is completed, where are these costs transferred from and to? 4. What happens when a manufacturer sells its finished goods to customers?

1). When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. 2). Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. 3). Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. 4). When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

What are the three things that managers do to simplify Cost Volume Profit Analysis (CVP)?

1).Selling price is constant. The price of a product or service will not change as volume changes. 2).Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3).In multiproduct companies, the mix of products sold remains constant.

Job 101: One Elliptical Machine 1 machining direct labor hour 9 assembly direct labor hours Job 102: One treadmill Machine 4 machining direct labor hour 6 assembly direct labor hours DLH: 62,500 F & VMOH: 1,000,000 10 Direct Labor Hours Machining Department: $400,000 Assembly Department: $600,000 Machining DLH: 12,500 Assembly DLH: 50,000

1,000,000 / 62,500: $16 per direct labor hour ------------ Applied MOH: $16 * 10= 160 Applied moh ------------ 400,000 / 12,500: $32 per direct labor hour 600,000 / 50,000: $12 per direct labor hour ------------ Job 101: MDLH x $32 + 9 ADLH x $12= $140 Applied MOH Job 102: MDLH x $32 + 6 ADLH x $12= $200 Applied MOH ------------- Plantwide | Departmental | Cost differential Job 101: One Elliptical $160 $140 $20 over-costed Job 102: One Treadmill $160 $200 $40 under-costed

5 Purposes of Cost Classification

1. Assigning costs to cost objects 2. Accounting for costs in manufacturing companies 3. Preparing financial statements 4. Predicting cost behavior in response to changes in activity 5. Making decisions

Three types of manufacturing costs

1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead

What is the POHR?

used to apply overhead to jobs is determined before the period begins.

Prepare a CVP graph using the information below, then find the BE point. Units Sold: 0 Units Sold: 200 Units Sold: 400 Units Sold: 600 Sales: $ -, $ 100,000, $ 200,000, $ 300,000 Total variable expenses: -, 60,000, 120,000, 180,000 Contribution margin: -, 40,000, 80,000, 120,000 Fixed expenses: 80,000, 80,000, 80,000, 80,000 Net operating income (loss): $ (80,000), $ (40,000), $ -, $ 40,000

1. In a CVP graph, unit volume is usually represented on the horizontal (x) axis and dollars on the vertical (y) axis. 2. Draw a line parallel to the volume axis to represent total fixed expenses. 3. plot the point representing total expenses (fixed and variable). Draw a line through the data point back to where the fixed expenses line intersects the dollar axis. (Line should be sloping up to the right) 4. plot the point representing total sales. Draw a line through the data point back to the point of origin. 5. Break-even point (400 units or $200,000 in sales) 6. Loss area is left most area underneath Sales, total expenses, and fixed expenses. Profit area between total expenses and sales in the top left.

When is Job Order Costing used?

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Five Limitations of ABC

1. Substantial resources required to implement and maintain 2. Resistance to unfamiliar numbers and reports 3. Desire to fully allocate all costs to products 4. Potential misinterpretation of unfamiliar numbers 5. Does not conform to GAAP. Two costing systems may be needed

What are the three reasons why thereported product margins for the twocosting systems differ from one another.

1. Traditional costing allocates all manufacturing overhead to products. ABC costing only assigns manufacturing overhead costs consumed by products to those products. 2. Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume-related allocation bases. 3. Traditional costing disregards selling and administrative expenses because they are assumed to be period expenses. ABC costing directly traces shipping costs to products and includes nonmanufacturing overhead costs caused by products in the activity cost pools that are assigned to products.

7 key factors for managerial accounting

1. Users: Managers who plan for and control an organization 2. Time: Future emphasis 3. verifiability vs relevance: Emphasis on relevance 4. Precision vs. timeliness: Emphasis on timeliness 5. Subject: Focus on segment reports 6. Rules: Not bound by GAAP/IFRS or any prescribed format 7. Requirement: Not mandatory

Why do POHR rely on estimated data?

1.Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2.Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

What are some examples of companies that would use job-order costing include:

1.Boeing (aircraft manufacturing) 2.Bechtel International (large-scale construction) 3.Walt Disney Studios (movie production)

What are the three types of costs in the schedules of COGS? What do they calculate?

1.Direct materials. 2.Direct labor. 3.Manufacturing overhead. The schedules calculate: 1.The cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production. 2.The manufacturing costs associated with goods that were finished during the period.

4 steps to calculating POHR:

1.Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2.Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3.Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Where: Y = Estimated total manufacturing overhead cost a = Estimated total fixed manufacturing overhead cost b = Estimated variable manufacturing overhead cost per unit of the allocation base X = Estimated total amount of the allocation base 4. Compute the predetermined overhead rate.

Most companies do not use ABC for external reporting because

1.External reports are less detailed than internal reports. 2.It may be difficult to make changes to the company's accounting system. 3.ABC does not conform to GAAP. 4.Auditors may be suspect of the subjective allocation process based on interviews with employees.

How is remaining MOH disposed of?

1.It can be closed to Cost of Goods Sold. 2.It can be closed proportionally to Work in Process, Finished Goods, and Cost of Goods Sold.

pros and cons of job order costing

1.Job-order costing systems can accurately trace direct materials and direct labor costs to jobs. 2.Job-order costing systems often fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs.

How should COGS be adjusted on the income statement when under or overapplied?

1.The adjustment for underapplied overhead increases cost of goods sold and decreases net operating income. 2.The adjustment for overapplied overhead decreases cost of goods sold and increases net operating income.

What is underapplied and overapplied overhead?

1.When a company applies less overhead to production than it actually incurs, it creates what is known as underapplied overhead. 2.When it applies more overhead to production than it actually incurs, it results in overapplied overhead.

What are finished goods?

1consist of completed units of product that have not been sold to customers.

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (400 bicycles): $ 200,000 Less: Variable expenses: 120,000 Contribution margin: 80,000 Less: Fixed expenses: 80,000 Net operating income: $ - Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 What is RBC's margin of safety as a percent of sales?

20% 50,000 / 250,000 = 20%

400 units BE: FE / CM per unit 80,000 / (500 - 300) = 400

500 Units Sales: $ 250,000 Less: Variable expenses: 150,000 CM: 100,000 Fixed Expenses: 80,000 NOI: $ 20,000 $80,000 / 200,000 = 60% 1 - 60% = 40% CM A $50,000 increase in sales revenue results in a $20,000 increase in C M ($50,000 × 40% = $20,000).

Why are ABC cost thought to be most accurate?

ABC costs are generally thought to be the most accurate because ABC takes into account (1) the specific resources each product uses (for example, inspecting resources) and (2) the extent to which they use these resources (for example, three inspections of the elliptical, but six inspections of the treadmill)

What does ABC exclude?

ABC excludes organization-sustaining costs and idle capacity costs from product cost.

What is ABC?

ABC is a costing method designed to provide managers with cost information for strategic and other decisions that potentially affect capacity, and therefore, "fixed" as well as variable costs. It is ordinarily used as a supplement to, rather than as a replacement for, the company's usual costing system.

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. For Ruger Corporation, we will assume 750 of the 1,000 gold medallions in Job A were shipped to customers by the end of the month for total sales revenue of $225,000. Because 1,000 units were produced and the total cost of the job from the job cost sheet was $158,000, the unit product cost was $158. The following journal entries would record the sale (all sales were on account):

Accounts Receivable: dr. 225,000 Sales: cr. 225,000 ----------- Cost of Goods Sold: dr. 118,500 Finished Goods: cr. 118,500

What is activity based management?

Activity-based management (ABM) is closely related to and draws upon data from activity-based costing. Activity-based management is a means of performing value chain analysis and business process reengineering. Activity-based management uses activity analysis and activity-based costing data to improve the value of the company's products and services and to increase the company's competitiveness. Operational ABM uses ABC data to improve efficiency. The goal is for activities that add value to the product to be identified and improved, while activities that do not add value are reduced in order to cut costs without reducing the value of the product or service. Strategic ABM uses ABC data to make strategic decisions about what products or services to offer and what activities to use to provide those products and services. Because ABC costs can also be traced to individual customers, strategic ABM can also be used to do customer profitability analysis in order to identify which customers are the most profitable so the company can focus more on them and on serving their needs.

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. Advertising was $42,000, and other selling and administrative expenses in April totaled $8,000. The following entry records these items:

Advertising Expense: dr. 42,000 Other Selling and Administrative Expense: dr. 8,000 Accounts Payable*: 50,000 *Other accounts such as Cash may also be credited.

What are administrative costs?

All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.

What is manufacturing overhead?

All manufacturing costs that are not classified as either direct materials or direct labor. Includes indirect materials and indirect labor

What is a subsidiary ledger?

All of a company's job cost sheets

Advantages and disadvantages of high and fixed cost structures

An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with a lower proportion of fixed costs. A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with a lower proportion of fixed costs. Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000, and the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? a. $20,000. b. $740,000. c. $780,000. d. $760,000.

B. $130,000 + $760,000 = $890,000 $890,000 − $150,000 = $740,000

Direct materials used in production totaled $280,000. Direct labor was $375,000, and $180,000 of manufacturing overhead was added to production for the month. What were total manufacturing costs incurred for the month? a. $555,000. b. $835,000. c. $655,000. d. Cannot be determined.

B. Direct materials: $280,000 + Direct labor: 375,000 + Mfg. overhead applied: 180,000 = Mfg. costs incurred for the month: $835,000

Tiger, Inc., had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine-hour. Tiger, Inc., worked 290,000 machine-hours during the period. Tiger's manufacturing overhead is: a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.

B. Overhead applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied overhead $1,210,000 − $1,160,000 = $50,000

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars? a. $1,300. b. $1,715. c. $1,788. d. $3,129.

B. Break even sales: FE / CM Ratio $1,300 / .758 =$1,715

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the CM ratio for Coffee Klatch? a. 1.319. b. 0.758. c. 0.242. d. 4.139.

B. CM Ratio: Unit CM / Unit Selling Price (1.49-.36) / 1.49 =.758

Suppose that your car could be sold now for $5,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

B. Answer: No, it is not a sunk cost.

Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don't want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A. Yes, the licensing cost is relevant. B. No, the licensing cost is not relevant.

B. Answer: No, the licensing cost is not relevant.

Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A. Manufacturing equipment depreciation. B. Property taxes on corporate headquarters. C. Direct materials costs. D. Electrical costs to light the production facility. E. Sales commissions.

B. Answer: Property taxes on corporate headquarters. E. Answer: Sales commissions.

Work in process formula

Beginning work in process inventory + Total manufacturing costs = Total work in process for the period

costs of goods manufactured formula

Beginning work in process inventory + Total manufacturing costs = Total work in process for the period - Ending work in process inventory = COGM

Greenwood Coffee is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $3.79, and the average variable expense per cup is $0.94. The average fixed expense per month is $1,800. An average of 1,100 cups are sold each month. What is the break-even sales dollars?

Break-even sales = Fixed expenses / CM ratio =1,800 / .752 =2,394

Greenwood Coffee is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $3.79, and the average variable expense per cup is $0.94. The average fixed expense per month is $1,800. An average of 1,100 cups are sold each month. What is the break-even sales in units?

Break-even= Fixed expenses / CM per unit =1,800 / 2.85 = 632 cups

Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? a. $276,000. b. $272,000. c. $280,000. d. $2,000.

C. Beg. raw materials: $ 32,000 + Raw materials purchased: 276,000 = Raw materials available for use in production: $308,000 − Ending raw materials inventory: 28,000 = Raw materials used in production: $280,000

Beginning work in process was $125,000. Manufacturing costs added to production for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? a. $1,160,000. b. $910,000. c. $760,000. d. Cannot be determined.

C. Beginning work in process inventory: $125,000 + Mfg. costs incurred for the period: 835,000 = Total work in process during the period: $960,000 − Ending work in process inventory: 200,000 = Cost of goods manufactured: $760,000

Each month, RBC must generate at least $80,000 in total contribution margin to break even (which is the level of sales at which profit is zero).

Which of the following costs would be variable with respect to the number of ice cream cones sold at Baskin-Robbins? A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

C. Answer: The cost of ice cream. D. Answer: The cost of napkins for customers.

CM Ratio Sales: 100% Variable Expense: 60% CM: 40%

CM Ratio to the variable expense

CM Ratio = Contribution margins / Sales CM Ratio = Sales - Variable expense / Sales CM Ratio = 1 - Variable expense ratio

CM Ratio: $80,00 / $200,000 = 40% Each $1.00 increase in sales results in a total contribution margin increase of 40¢.

CM ratio per unit formula

CM ratio per unit: CM per unit / Selling price per unit

CM ratio: $200 / $500 = 40%

in selling a big mac, what are fixed costs? • Ingredients • Cookers • Cashiers • Rent • Franchise fees • Depreciation for cooking equipment • Store Manager • Utilities

Cashiers rent Depreciation Store manager

Job order costing flow

Charge direct material and direct labor costs to each job as work is performed. Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.

What are Common Costs?

Common costs are costs of operating a business that cannot be allocated to any specific user or users on any cause-and-effect basis. Examples of common costs are the chief executive officer's salary, the costs of the financial reporting function of the accounting department, and the costs of the budget department.

The Institute of Management Accountant's (IMA) Statement of Ethical Professional Practice provides guidelines for ethical behavior. What are the 4?

Competence Confidentiality Integrity Credibility

Operating leverage formula

Contribution Margin / Operating Income

CM Ratio Formula

Contribution Margin / Sales

What are selling costs?

Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs.

What are Indirect Costs?

Costs that cannot be easily and conveniently traced to a unit of product or other cost object Ex: MOH

What is indirect labor?

Costs that cannot be easily or conveniently traced to specific units of product.

5 levels of ABC and definitions

Customer Orders: Number of customer orders. Assigned all costs of resources that are consumed by taking and processing customer orders. Design Changes: Number of design changes. Assigned all costs of resources consumed by customer-requested design changes. Order Size: Machine-hours. Assigned all costs of resources consumed as a consequence of the number of units produced. Customer Relations: Number of active customers. Assigned all costs associated with maintaining relations with customers. Other: Not applicable. Assigned all organization-sustaining costs and unused capacity costs.

Job WR53 at NW Fab, Inc., required $200 of direct materials and 10 direct labor-hours at $15 per hour. Estimated total overhead for the year was $760,000, and estimated direct labor-hours were 20,000. What would be recorded as the cost of Job WR53? a. $200. b. $350. c. $380. d. $730.

D. POHR: $760,000 / 20,000 hours = $38 DM: $200 DL ($15*$10): $150 MOH ($38 * $10): $380 Total Cost: $730

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units? a. 872 cups. b. 3,611 cups. c. 1,200 cups. d. 1,150 cups.

D. Break even: FE / CM per unit = $1,300 / (1.49-.36) =1,150 cups

How Costs Are Treated Under Activity-Based Costing

Each ABC cost pool has its own unique measure of activity, while traditional cost systems usually rely on direct labor-hours and/or machine-hours to allocate all overhead costs to products. Direct-labor and machine-hours work correctly when changes in the quantity of the base are correlated with changes in the overhead costs being assigned using the base. Relying exclusively on direct labor-hours and/or machine-hours to assign overhead costs to products has come under increased scrutiny since, on an economy-wide basis, direct labor and overhead costs have been moving in opposite directions and the variety of products produced by companies has increased.

total manufacturing costs formula

DM (also called raw materials used in production) + DL + MOH(applied) = Total Manufacturing costs

Decision making in managerial accounting

Decision making involves making a selection among competing alternatives. What should we be selling to? Who should we be serving? How should we execute?

Degree of operating leverage: Contribution Margin / Operating Income $100,000 / $20,000 = 5

What is a differential cost?

Differential costs (or incremental costs) are the difference in cost between any two alternatives. A difference in revenue between two alternatives is called differential revenue. Both are always relevant to decisions. Differential costs can be either fixed or variable.

What is a conversion cost?

Direct Labor + Manufacturing Overhead

What is a prime cost?

Direct Materials + Direct Labor

What are the two types of cost objects?

Direct and indirect

in selling a big mac, what are direct costs and what are indirect? • Ingredients • Cookers • Cashiers • Rent • Franchise fees • Depreciation for cooking equipment • Store Manager • Utilities

Direct: Ingredients, cookers Indirect: Cashiers, Rent Franchise fees Depreciation Store Manager Utilities

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 Suppose RBC wants to compute the sales dollars required to break even (earn a target profit of $0). Let's use the formula method.

Dollar sales to break even formula: Fixed Expenses / CM Ratio Dollar Sales: $80,000 / 40% = $200,000 sales

Calculating the allocation of under- or overapplied overhead between Work in Process, Finished Goods, and Cost of Goods Sold: Assume we have $30,000 of overapplied overhead Let's assume the overhead applied in Ending Work in Process Inventory, Ending Finished Goods Inventory, and Cost of Goods Sold is $68,000, $204,000, and $408,000, respectively (total value of accounts $680,000). Also provide a journal entry for the cost items.

Ending WIP inventory = $68,000 ÷ $680,000 = 10% Ending finished goods inventory = $204,000 ÷ $680,000 = 30% Cost of goods sold = $408,000 ÷ $680,000 = 60% -------------------- Amount | Percent of Total | Allocation of $30,000 Work in process: $ 68,000 | 10% | $ 3,000 Finished goods: 204,000 | 30% | 9,000 Cost of goods sold: 408,000 | 60% | 18,000 Total: $680,000 | 100% | $30,000 ---------------- Since we have overapplied, we remove it. Manufacturing Overhead: dr. 30,000 Work in Process Inventory: cr. 3,000 Finished goods Inventory: cr. 9,000 Cost of Goods Sold: cr. 18,000

Calculating the allocation of under- or overapplied overhead between Work in Process, Finished Goods, and Cost of Goods Sold: Assume we have $30,000 of underapplied overhead. Assume the overhead applied in Ending Work in Process Inventory, Ending Finished Goods Inventory, and Cost of Goods Sold is $68,000, $204,000, and $408,000, respectively (total value of accounts $680,000).

Ending WIP inventory = $68,000 ÷ $680,000 = 10% Ending finished goods inventory = $204,000 ÷ $680,000 = 30% Cost of goods sold = $408,000 ÷ $680,000 = 60% -------------------- Amount | Percent of Total | Allocation of $30,000 Work in process: $ 68,000 | 10% | $ 3,000 Finished goods: 204,000 | 30% | 9,000 Cost of goods sold: 408,000 | 60% | 18,000 Total: $680,000 | 100% | $30,000 ---------------- Since we have underapplied, we add it back Work in Process Inventory: dr. 3,000 Finished goods Inventory: dr. 9,000 Cost of Goods Sold: dr. 18,000 Manufacturing Overhead: cr. 30,000

Planning in managerial accounting

Establish Goals Specify How Goals Will Be Achieved Develop Budgets

POHR formula

Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period

7 key factors for financial accounting

Financial Accounting 1. Users: External persons who make financial decisions 2. Time focus: Historical perspective 3. Verifiability versus relevance: Emphasis on objectivity and verifiability 4. Precision versus timeliness: Emphasis on precision 5. Subject: Primary focus is on companywide reports 6. Rules: Must follow GAAP/IFRS and prescribed formats 7. Requirement Mandatory for external reports

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. Job A was completed during April, and Job B was incomplete at the end of the month. Thus, the following entry transfers the cost of Job A from Work in Process to Finished Goods:

Finished Goods: dr. 158,000 Work in Process: cr. 158,000 Because Job B was not completed by the end of the month, its assigned costs will remain in Work in Process and carry over to the next month. If a balance sheet were prepared at the end of April, the cost accumulated thus far on Job B ($72,000) would appear in the asset account Work in Process.

Dollar sales to break even formula

Fixed Expenses / CM Ratio

Unit Sales to break even formula

Fixed Expenses / Unit CM

Assume office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. How would our fixed costs increase?

Fixed costs would increase in a step fashion at a rate of $30,000 for each additional 1,000 square feet.

in selling a big mac, what are mixed costs? • Ingredients • Cookers • Cashiers • Rent • Franchise fees • Depreciation for cooking equipment • Store Manager • Utilities

Franchise fees Utilities

If we assume that R B C has actual sales of $250,000, given that we have already determined the break-even sales to be $200,000, the margin of safety is $50,000 Total Sales - Breakeven sales

How are nonmanufacturing as well as manufacturing costs assigned in ABC?

In ABC, nonmanufacturing as well as manufacturing costs may be assigned to products but only on a cause-and-effect basis. ABC systems can assign sales commissions, shipping costs, and warranty repair costs to specific products.

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 What is the profit impact if RBC can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000 using shortcut incremental analysis?

Increase in C M (40 units × $200)= $ 8,000 Increase in advertising expenses = 10,000 Decrease in net operating income= $ (2,000)

in selling a big mac, what are variable costs? • Ingredients • Cookers • Cashiers • Rent • Franchise fees • Depreciation for cooking equipment • Store Manager • Utilities • oil • Packaging

Ingredients Cookers Oil Packaging

Activity | Total activity cost pool | Activity allocation base | Total estimated amount of allocation base Machine Setup: $80,000 | Number of setups | 8,000 setups Materials Handling: $200,000 | Number of parts moved | 400,000 parts Fabricating Parts: $300,000 | Machine hours |12,500 machine hours Supervising Assembly: $150,000 | Direct labor hours | 50,000 DL hours Inspecting: $170,000 |Number of inspections | 34,000 inspections Packaging: $100,000 | Cubic feet packaged |400,000 cubic feet $1,000,000 Job 101: One Elliptical Machine • 2 setups = ? • 20 parts = ? • 1 machine hour = ? • 9 DL hours = ? • 3 inspections = ? • 52 cubic feet = ? Job 102: One Elliptical Machine • 4 setups = ? • 26 parts = ? • 4 machine hour = ? • 6 DL hours = ? • 6 inspections = ? • 60 cubic feet = ?

Machine Setup: 80,000 / 8,000: $10.00 per set up Materials Handling:$200,000 / $400,000: $.50 per start Fabricating Parts: $300,000 / 12,500: $24.00 per machine hr Supervising Assembly: $150,000 / 50,000 DL: $3.00 per DL hr Inspecting: $170,000 / 34,000 inspections: $5.00 per inspection Packaging: $100,000 / 400,000 cubic feet: .25 per cubic feet ------------------------ Job 101: One Elliptical Machine • 2 setups = 20 • 20 parts = 10 • 1 machine hour = 24 • 9 DL hours = 27 • 3 inspections = 15 • 52 cubic feet = 13 $109 Applied moh ------------------------ Job 102: One Elliptical Machine • 2 setups = 40 • 20 parts = 13 • 1 machine hour = 96 • 9 DL hours = 18 • 3 inspections = 30 • 52 cubic feet = 15 $212 Applied moh ------------------ Plantwide | Departmental | Cost differential Job 101: One Elliptical $160 $140 109 under-costed Job 102: One Treadmill $160 $200 $212 over-costed

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. Assume that Ruger Corporation incurred the following general factory costs during April: 1.Utilities (heat, water, and power), $21,000. 2.Rent on factory equipment, $16,000. 3.Miscellaneous factory overhead costs, $3,000.

Manufacturing Overhead: dr. 40,000 Accounts Payable*: cr. 40,000 *Accounts such as Cash may also be credited.

Margin of Safety in Units formula: Margin of safety / cost per unit $50,000 / $500 = 100 bikes

Margin of Safety in Units formula

Margin of safety / cost per unit

Greenwood Coffee is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $3.79, and the average variable expense per cup is $0.94. The average fixed expense per month is $1,800. An average of 1,100 cups are sold each month. What is the margin of safety expressed in cups?

Margin of safety = Total sales - Break-even sales = 1,100 cups − 632 cups = 468 cups

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups? a. 3,250 cups. b. 950 cups. c. 1,150 cups. d. 2,100 cups.

Margin of safety = Total sales - Break-even sales = 2,100 cups − 1,150 cups = 950 cups

Is degree of operating leverage a constant?

NO. it is greatest at sales near BEP and decreases as sales and profits rise. If a company is near break-even point, then even a small percentage increase in sales volume can cause a huge percentage increase in profits.

What is operating leverage?

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits. A company whose costs are mostly fixed has a high level of operating leverage. If a company has a high level of operating leverage, it means that much of any increase in revenue will fall straight to the bottom line in the form of profit, because the incremental cost of producing another unit is so low. For example, a swim club is a business that operates with a high level of operating leverage. Once the club is built and opened, its costs are relatively fixed. With the same number of staff, same size pool, same locker rooms, same maintenance expense, the club could go from 500 members to 510 members with little additional cost. Nearly 100% of the membership fees collected from the 10 new members would turn into profit.

What is overapplied overhead and when does it exist?

Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

PearCo's actual overhead for the year was $650,000 with a total of 170,000 direct labor-hours worked on jobs. PearCo's predetermined overhead rate is $4.00 per direct labor-hour. Is overhead under or overapplied for the period?

Overhead applied during the period: Applied overhead = POHR × Actual direct labor -hours Applied overhead = $4.00 per DLH × 170,000 DLH = $680,000 Actual: $650,000 PearCo has overapplied overhead for the year by $30,000. What will PearCo do?

Per Unit $ 500 - 300 = $ 200

At Coffee Klatch, the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300, and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase? a. 30.0%. b. 20.0%. c. 22.1%. d. 44.2%.

Percent increase in sales : 20.0% × Degree of operating leverage : 2.21 Percent increase in profits: 44.2% Total Sales (2,520 cups): $ 3,755 Less: Variable expenses: 907 Contribution margin: 2,848 Less: Fixed expenses: 1,300 Net operating income: $ 1,548 % change in sales: 20.0% % change in NOI: 40.0%

With an operating leverage of 5, if RBC increases its sales by 10%, net operating income would increase by 50%.

Percent increase in sales: 10% Degree of operating leverage: 5 10% * 5= 50% Percent increase in profits: 50%

What are period costs?

Period costs are expensed to the Income Statement in the period incurred. Includes all selling costs and administrative costs

3 goals of management

Planning (PLAN) Controlling (MEASURE) Decision Making (DECIDE)

What are product costs?

Product costs are costs included in making a product and include: 1) Direct Material 2) Direct Labor 3) Manufactoring Overhead and ALL other costs traceable to finished product. Product costs are not expensed to the Income Statement until the product is sold.

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (400 bicycles): $ 200,000 Less: Variable expenses: 120,000 Contribution margin: 80,000 Less: Fixed expenses: 80,000 Net operating income: - If RBC sells one more bike (401 bikes), net operating income will increase by using Unit CM Profit formula?

Profit = ($500 − $300) × 401 − $80,000 Profit = $200 × 401 − $80,000 Profit = $80,200 − $80,000 Profit = $200

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (400 bicycles): $ 200,000 Less: Variable expenses: 120,000 Contribution margin: 80,000 Less: Fixed expenses: 80,000 Net operating income: - If RBC increases sales from 400 to 500 bikes ($50,000), contribution margin will increase by using CM ratio profit?

Profit = (CM ratio × Sales) − Fixed expenses Profit = (40% × $250,000) − $80,000 Profit = $100,000 − $80,000 Profit = $20,000

Profit Formulas (4 in total)

Profit = (Sales − Variable expenses) − Fixed expenses Profit = (P × Q − V × Q) − Fixed expenses Profit = (P − V) × Q − Fixed expenses Profit = Unit C M × Q − Fixed expenses

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 Suppose RBC management wants to know the sales volume that must be generated to earn a target profit of $100,000.

Profit = CM ratio × Sales - Fixed expenses $100,000 = 40% × Sales - $80,000 40% × Sales = $100,000 + $80,000 Sales = ($100,000 + $80,000) ÷ 40% Sales = $450,000

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 Suppose RBC wants to compute the sales dollars required to break even (earn a target profit of $0). Let's use the equation method.

Profit = CM ratio × Sales − Fixed expenses $0 = 40% × Sales − $80,000 40% × Sales = $80,000 Sales = $80,000 ÷ 40% Sales = $200,000

Target Profit Analysis Equation Method Formula

Profit = Unit C M × Q − Fixed expenses

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 Suppose RBC's management wants to know how many bikes must be sold to earn a target profit of $100,000 using Target Profit Analysis Equation Method.

Profit = Unit C M × Q − Fixed expenses $100,000 = $200 × Q − $80,000 $200 × Q = $100,000 + $80,000 Q = ($100,000 + $80,000) ÷ $200 Q = 900 units

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. Purchase of raw materials in journal entry form: On April 1, Ruger Corporation had $7,000 in raw materials on hand. During the month, the company purchased on account an additional $60,000 in raw materials.

Raw Materials: dr. 60,000 Accounts Payable: cr. 60,000

What are raw materials used in production?

Raw material purchases made during the period are added to beginning raw materials inventory. The ending raw materials inventory is deducted

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. Ruger Corporation incurred $30,000 in selling and administrative salary costs during April. The following entry summarizes the accrual of those salaries: Depreciation on office equipment during April was $7,000. The entry is as follows:

Salaries Expense: dr. 30,000 Salaries and Wages Payable: cr. 30,000 ---------- Depreciation Expense: dr. 7,000 Accumulated Depreciation: cr. 7,000

Line items in a traditional Income statement

Sales COGS Gross Profit Selling and admin. Expenses NOI

Line items in a contribution statement

Sales Variable Expenses Contribution Margin Fixed Expenses NOI

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine the sales dollars that must be generated to attain a target profit of $2,500 per month. a. $2,550. b. $5,013. c. $8,458. d. $10,555.

Sales Dollars to attain target profit: Target Profit + FE / (CM ratio) $2,500 + $1,300 / (1.49-.36) / $1.49 =$3800 / .758 =$5,013

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 What is the profit impact if RBC: 1.Pays a $15 sales commission per bike sold instead of paying salespersons flat salaries that currently total $6,000 per month, and 2.Increases unit sales from 500 to 575 bikes?

Sales increase by $37,500, fixed expenses decrease by $6,000, and net operating income increases by $12,375. 575 units × $315 = $181,125 575 units Sales (575 bicycles): $ 287,500 Less: Variable expenses: 181,125 Contribution margin: 106,375 Less: Fixed expenses: 74,000 Net operating income: $ 32,375

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 What is the profit impact if RBC can use higher-quality raw materials, thus increasing variable costs per unit by $10, to generate an increase in unit sales from 500 to 580?

Sales increase by $40,000 and net operating income increases by $10,200. 580 units × $310 variable cost/unit = $179,800 580 units Sales (580 bicycles): $ 290,000 Less: Variable expenses: 179,800 Contribution margin: 110,200 Less: Fixed expenses: 80,000 Net operating income: $ 30,200

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 What is the profit impact if RBC: 1.Cuts its selling price $20 per unit, 2.Increases its advertising budget by $15,000 per month, and 3.Increases sales from 500 to 650 units per month?

Sales increase by $62,000, fixed costs increase by $15,000, and net operating income increases by $2,000. 650 units × $480 = $312,000 650 units Sales (650 bicycles): $ 312,000 Less: Variable expenses: 195,000 Contribution margin: 117,000 Less: Fixed expenses: 95,000 Net operating income: $ 22,000

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 What is the profit impact if RBC can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000?

Sales increased by $20,000, but net operating income decreased by $2,000. $80,000 + $10,000 advertising = $90,000 540 units Sales (540 bicycles): $ 270,000 Less: Variable expenses: 162,000 Contribution margin: 108,000 Less: Fixed expenses: 90,000 Net operating income: $ 18,000

What are the 5 levels of ABC?

Unit level activity Batch level activity Product level activity Organization sustaining activity Customer level activity

What is a sunk cost?

Sunk costs have already been incurred and cannot be changed now or in the future. These irrelevant costs should be ignored when making decisions.

Target Profit Analysis Sales Dollars Formula Method

Target Profit + FE / (CM Ratio)

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 Suppose RBC's management wants to know how many bikes must be sold to earn a target profit of $100,000 using Target Profit Analysis Formula Method.

Target Profit Analysis Formula Method: unit sales to attain the target profit = (target profit + fixed expenses) / CM per unit Unit Sales: $100,000 + $80,000 / (200) Unit Sales = 900 units

How to choose an allocation base

The allocation base in the predetermined overhead rate must drive the overhead cost to improve job cost accuracy

controlling in managerial accounting

The control function gathers feedback to ensure that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

What is cost of goods manufactured?

The cost of goods that were completed and moved to Finished Goods inventory.

What does a job cost sheet do?

The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in Work in Process and Finished Goods on the balance sheet. The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in Cost of Goods Sold on the income statement.

Greenwood Coffee is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $3.79, and the average variable expense per cup is $0.94. The average fixed expense per month is $1,800. Use the formula method to determine how many cups of coffee would have to be sold to attain a target profit of $2,500 per month.

Unit sales to attain = Target profit + Fixed expenses / Unit CM = $1,800 + $2,500 / $2.85 = 1,509 cups

What is opportunity cost?

The potential benefit that is given up when one alternative is selected over another. These costs are not usually found in accounting records but must be explicitly considered in every decision.

What is cost structure?

The relative proportion of fixed versus variable costs that a company incurs.

Total Manufacturing Costs

The sum of direct materials, direct labor, and manufacturing overhead incurred in the current period.

Margin of Safety in Dollars

Total Sales - Break Even Sales

What is underapplied overhead and when does it exist?

Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.

Unit CM Formulas

Unit CM = Selling price per unit - Variable expenses per unit Unit CM = P-V

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain a target profit of $2,500 per month. a. 3,363 cups. b. 2,212 cups. c. 1,150 cups. d. 4,200 cups.

Unit Sales to attain target Profit = Target Profit + FE / (Unit CM) $2,500 + $1,300 / (1.49-.36) = $3,800 / (1.13) =3,363 cups

Unit Sales to break even formula = Fixed Expenses / Unit CM $80,000 / $200 = 400 units

What is a plantwide overhead rate? Why is it beneficial to use it?

Using one predetermined manufacturing overhead rate to allocate MOH to units. 1.It is often overly simplistic and incorrect to assume that direct labor-hours is a company's only manufacturing overhead cost driver. 2.If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.

VER = $120,000 / $200,000 = 60%

Faced with rising pressure for a $15 per hour minimum wage rate, the fast food industry is currently exploring the possible use of robotics for order-taking and food preparation tasks. Assume the following facts: 1.By investing in one robotic arm, a fast food restaurant could potentially save $15 per hour plus 7.65% payroll taxes. While the tasks performed by a human associate are more flexible and adaptable than those performed by a robot, assume the robot would replace 10 hours of human labor, 365 days a year 2.The robotic arm is estimated to cost $35,000 plus $5,000 for installation. While the equipment itself may be in workable condition for up to five years, the company is viewing its implementation as a one-year experiment. 3.The annual cost of running the robotic arm, including utilities and servicing, is expected to be $1,500.

Wages: 15 * 10 * 365= $54,750 Payroll taxes: 7.65% of gross wages = 4,188 Total expected benefits: 58,938 (rhs) Expected Costs Robotic arm and installation: 40,000 Operating and servicing costs: 1,500 Total expected costs: 41,500 Net expected benefit in the first year: 17,438

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. During April, materials requisition forms were prepared to authorize withdrawing $52,000 in raw materials from the storeroom for use in production. These raw materials included $50,000 of direct and $2,000 of indirect materials. Entry (2) records issuing the materials to the production departments.

Work in Process: dr. 50,000 Manufacturing Overhead: dr. 2,000 Raw Materials: cr. 52,000

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. In April, the employee time tickets (which provide hourly summaries of each employee's activities throughout the day) included $60,000 recorded for direct labor and $15,000 for indirect labor. The following entry summarizes these costs:

Work in Process: dr. 60,000 Manufacturing Overhead: dr. 15,000 Salaries and Wages Payable: cr. 75,000

To illustrate the cost flows within a job-order costing system, we will record Ruger Corporation's transactions for the month of April. Ruger is a producer of gold and silver commemorative medallions, and it worked on only two jobs in April. Job A, a special minting of 1,000 gold medallions commemorating the invention of motion pictures, was started during March and completed in April. As of March 31, Job A had been assigned $30,000 in manufacturing costs, which corresponds with Ruger's Work in Process balance on April 1 of $30,000. Job B, an order for 10,000 silver medallions commemorating the fall of the Berlin Wall, was started in April and was incomplete at the end of the month. Assume that Ruger Corporation's predetermined overhead rate is $6 per machine-hour. Also assume that during April, 10,000 machine-hours were worked on Job A and 5,000 machine-hours were worked on Job B (a total of 15,000 machine-hours). Thus, $90,000 in overhead cost ($6 per machine-hour×15,000 machine-hours = $90,000) would be applied to Work in Process. The following entry records the application of manufacturing overhead to Work in Process:

Work in Process: dr. 90,000 Manufacturing Overhead: cr. 90,000

PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period's estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000 and variable manufacturing overhead costs of $2.75 per direct labor-hour. What is the POHR?

Y = a + bX Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours) Y = $200,000 + $440,000 Y = $640,000 POHR: $640,000 estimated total MOH / 160,000 Estimated direct labor hours POHR: $4.00 per direct labor hout

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?

Y = a + bX Y = $40 + ($0.03 × 2,000) Y = $100

Trophy Company estimates that it will require 4,000 machine hours to meet the coming period's estimated production level. In addition, the company estimates total fixed manufacturing overhead at $6,400 and variable manufacturing overhead costs of $4 per machine hour.

Y = a + bX Y = $6,400 + ($4 per direct labor-hour ×4,000 machine hours) Y = $6,400 + $16,000 Y = $22,400 Estimated total overhead costs = $22,400 Estimated allocation base (cost driver) = 4,000 machine hours 22,400 / 4,000= $5.60 per machine hour

Mixed Cost equation

Y=a+bX y=total mixed cost a=total fixed cost b=variable cost per unit of activity x=level of activity

Will the amount of overhead applied to jobs during a period differ from the actual amount?

Yes

What is a variable cost? How does it behave per unit?

a cost that changes in total with the level of activity, but remains constant per unit. Total variable cost increases and decreases in proportion to changes in the activity level.

What is a fixed cost? How does it behave per unit?

a cost that does not change, no matter how much of a good is produced. Total fixed cost is not affected by changes in the activity level within the relevant range. Fixed cost per unit decreases as the activity level rises and increases as the activity level falls.

Dillon Products manufactures various machined parts to customer specifications. The company uses a job-order costing system and applies overhead cost to jobs on the basis of machine-hours. At the beginning of the year, the company used a cost formula to estimate that it would incur $4,800,000 in manufacturing overhead cost at an activity level of 240,000 machine-hours. The company spent the entire month of January working on a large order for 16,000 custom-made machined parts. The company had no work in process at the beginning of January. Cost data relating to January follow: a. Raw materials purchased on account, $325,000. b. Raw materials used in production, $290,000 (80% direct materials and 20%in direct materials). c. Labor cost accrued in the factory, $180,000 ( one-third direct labor and two-thirds indirect labor). d. Depreciation recorded on factory equipment, $75,000. e. Other manufacturing overhead costs incurred on account, $62,000. f. Manufacturing overhead cost was applied to production on the basis of 15,000 machine-hours actually worked during the month. g. The completed job for 16,000 custom-made machined parts was moved into the finished goods warehouse on January 31 to await delivery to the customer. (In computing the dollar amount for this entry, remember that the cost of a completed job consists of direct materials, direct labor, and applied overhead.)

a. Raw materials inventory: dr. 325,000 Accounts payable325,000 b.Work in process inventory: dr. 232000 Manufacturing overhead: dr. 58000 Raw materials inventory: cr. 290,000 c.Work in process inventory: dr. 60,000 Manufacturing overhead: dr. 120,000 Factory wages payable: cr. 180,000 d.manufacturing overhead: dr. 75,000 Accumulated depreciation: cr. 75,000 e.Manufacturing overhead: dr. 62,000 Accounts paybale: cr. 62,000 f.work in process inventory: dr. 300000 manufacturing overhead: cr. 300,000(4,800/240)*15000 g.finished goods inventory: dr. 592000 Work in process inventory: cr. 592000

What effect will the overapplied overhead have on net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

a. Answer: Net operating income will increase.

COGS formula

beginning inventory + COGM = COG available for sale - Ending finished goods inventory = COGS

Raw Materials used in production formula

beginning raw materials inventory + purchases of raw materials - ending raw materials inventory = raw materials used in production

What is benchmarking in ABC?

can be used to compare activity cost information with standards of performance achieved by other organizations.

What are the two types of fixed costs?

committed: Long-term, cannot be significantly reduced in the short term discretionary: May be altered in the short term by current managerial decisions

What is work in process?

consists of units of production that are only partially complete and will require further work before they are ready for sale to customers

What are Direct Costs?

costs that can be easily and conveniently traced to a unit of product or other cost object Ex: DM and DL

Racing Bicycle Company Contribution Income Statement For the Month of June Total Sales (500 bicycles): $ 250,000 Less: Variable expenses: 150,000 Contribution margin: 100,000 Less: Fixed expenses: 80,000 Net operating income: $ 20,000 Suppose RBC management wants to know the sales volume that must be generated to earn a target profit of $100,000 using dollar sales to attain the target profit.

dollar sales to attain the target profit: Target Profit + FE (CM ratio) Dollar Sales: $100,000 + $80,000 / (40%) Dollar Sales = $450,000

What do traditional costs systems rely on?

exclusively on allocation bases that are driven by the volume of production.

What are raw materials?

include any materials that go into the final product.

Managerial accounting

is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.

What is Financial accounting concerned with?

is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.

Why is the contribution income statement helpful to managers?

is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior.

What is CM, and what is it used to cover first, and what does left over CM contribute to?

is the amount remaining from sales revenue after variable expenses have been deducted. CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income.

What is the margin of safety?

is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

What is indirect materials?

materials that cannot be easily or conveniently traced to specific units of product.

What are ABC activity rates?

provide valuable clues concerning where there is waste and the opportunity for improvement.

What are Direct Materials?

raw materials that can be physically and directly associated with the finished product during the manufacturing process Ex: A radio installed in an automobile

What is a job cost sheet?

records the materials, labor, and manufacturing overhead costs charged to that job

What does cost behavior mean? What are the most common classifications of cost behavior?

refers to how a cost will react to changes in the level of activity. •Variable costs. •Fixed costs. •Mixed costs.

What is overhead application?

the process of assigning overhead costs to specific jobs. Overhead applied to a particular job: POHR * Amount of allocation base incurred by the job

What is a sales mix?

the relative proportions in which a company's products are sold

What is Direct Labor?

the work of factory employees that can be physically and directly associated with converting raw materials into finished goods Ex: Wages paid to automobile assembly workers

Variable Expense Ratio

variable expenses / sales

Credibility

• Communicate information fairly and objectively • Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. • Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

Confidentiality

• Do not disclose confidential information unless legally obligated to do so. • Ensure that subordinates do not disclose confidential information. • Do not use confidential information for unethical or illegal advantage.

Integrity

• Mitigate conflicts of interest and advise others of potential conflicts. • Abstain from activities that might discredit the profession. • Refrain from conduct that would prejudice carrying out duties ethically.

Competence

• Recognize and communicate professional limitations that preclude responsible judgment. • Follow applicable laws, regulations, and standards. • Provide accurate, clear, concise, and timely decision support information. • Maintain professional competence.

Activity Cost Pool

•A "cost bucket" in which costs related to a single activity measure are accumulated.

What is an activity in ABC?

•An event that causes the consumption of overhead resources.

Examples of manufacturing overhead

•Depreciation of manufacturing equipment •Utility costs •Property taxes •Insurance premiums incurred to operate a manufacturing facility Only those indirect costs associated with operating the factory are included in manufacturing overhead.

What are the types of product costs in a manufactoring company?

•Raw materials: Includes any materials that go into the final product. •Work in process: Consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. •Finished goods costs: Consists of completed units of product that have not yet been sold to customers.

What is an activity measure?

•The term cost driver is also used to refer to an activity measure. •An allocation base in an activity-based costing system.

What are the two main types of activity measures?

•Transaction driver: Simple count of the number of times an activity occurs. •Duration driver: A measure of the amount of time needed for an activity.

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