Managerial test 1

If a company's revenue is $600,000, net operating income is $135,000 and product costs are $215,000 then the company's gross margin totals ______________

$385,000

What are the 4 financial statements?

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

2 ways to accumulate the cost of a product/service. Which one is used by all industries (the focus)?

1. Job order costing (focus) 2. Process costing

Two classes of decision makers

1. Outside the company 2. Inside the company

Allocations are used to

1. Persuade organizations 2. Develop product cost 3. Influence behavior 4. Sensitize managers to the cost of a resource (IT costs) 5. Encourage managers to conform to a corporate goal (reduce labor)

Fix/var/mix: 1. salary 2. wages 3. indirect production labor

1. fixed 2. variable 3. variable

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its average costs per unit are as follows: Direct materials$5.30 Direct labor$2.80 Variable manufacturing overhead$1.40 Fixed manufacturing overhead$4.00 Fixed selling expense$2.30 Fixed administrative expense$2.20 Sales commissions$1.20 Variable administrative expense$0.45 If 8,000 units are produced and sold, what is the variable cost per unit produced and sold?

11.15:DM+DL+ var manu over+sales com+var admin expense. Sales commissions are variable costs.

Which of the following statements are true? 1. Opportunity cost is the value fo the next best option. 2. Indirect manufacturing costs are called manufacturing overhead (MOH). 3. All product costs are direct. 4. Sunk costs are relevant to a decision. 5. Costs on the financial income statement are organized by product and period. 6. 1, 2, 5

6

Margin of safety %

= (actual - breakeven sales) / (actual sales)

Direct cost

A cost that can be easily and conveniently traced to a specified cost object. Direct costs are assigned (traced) to the product as work is performed. Direct labor + direct materials. Not manufacturing overhead.

Indirect cost

A cost that cannot be easily and conveniently traced to a specified cost object. Manufacturing overhead.

Sunk cost

A cost that is paid in the past and not relevent

Differential (incremental) cost

A future cost that differs between any two alternatives.

Allocation base

A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects. It is common to all of the company's products and services.

Predetermined Overhead Rate

A rate used to charge manufacturing overhead cost to jobs that is established in advance for each period. It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period.

The concept of using multiple pools is the basis of __________________________ system which is the ___________ of how most companies allocate costs.

Activity Based Costing (ABC)

Predicting cost behavior mixed costs: Hi/Lo advantages and disadvantages

Advantages: Straightforward to calculate, aggregate numbers, data available Disadvantages: Assumes costs relatively stable, rough estimate

Predicting cost behavior mixed costs: Regression advantages and disadvantages

Advantages: Uses all available data, minimizes deviations Disadvantages: Needs lots fo data, more knowledge and work

Can direct, indirect, mfg, non-mfg, product, and period costs be variable, fixed, or mixed?

All

Cost object

Anything for which cost data are desired. Examples of cost objects are products, customers, geographic regions, and parts of the organization such as departments or divisions.

Increasing fixed costs increases ______________________, for a given volume.

Business risk

How to determine Multiple Predetermined Overhead Rates

By component: each element of MOH has its own rate By department: Each department that the product goes through has its own rate (ex. assembly, painting, quality control)

Are manufacturing costs prime or conversion costs.

Can be one or the other or both but they can't be neither.

The role of accounting is ______.

Communication

____________________________ is a model based on the contribution margin statement and uses cost behavior to determine how revenues, expenses, and profits will react to changes.

Cost-Volume-Profit analysis

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. All selling and administrative costs.

What are the 3 cost classifications used in decision making?

Differential costs, opportunity costs, sunk costs

Total costs of a cost object =

Direct costs + Indirect costs

Cost of job =

Direct materials: required $$$ of direct materials Direct labor: (required DL hours)(required rate $$$) MOH: (estimated total MOH / estimated DL hours)(required DL hours)

Who are the decision makers inside the company?

Executives (ceo, cfo, etc), dept managers (marketing, production, etc), employees

Financial vs. Management Accounting: users, time, format, frequency, content, level of detail

Financial 1. Users: external to the company 2. Time: focus on past performance & consequences, historic data, financial only 3. Format: Rules based, mandated by GAAP/IFRS 4. Frequency: Info reported annually & quarterly 5. Content: Objective, verifiable & precise 6. Level of detail: entire organization, highly aggregated Managerial 1. Users: Internal to the company 2. Time: Focus on future performance & decisions, all data (history, projections), financial & non-financial 3. Format: Decision based, any format 4. Frequency: Info generated as needed 5. Content: relevant and timely 6. Level of detail: Pieces of the organization, segment: product, region, dept.

Which of the following statements is false? 1. Creditors would be a user of financial accounting information. 2. Management accounting information is used to develop budgets. 3. Financial accounting information emphasizes decisions for the future. 4. Reports based on management accounting information are created when required.

Financial accounting information emphasizes decisions for the future.

What info is provided by the decision makers inside the company?

Financial and non-financial info is used to fulfill goals of planning, controlling, and decision making.

Total manufacturing overhead allocation rate =

Fixed manufacturing overhead + variable manufacturing overhead Fixed manufacturing overhead per unit = total fixed manufacturing overhead / Allocation rate Total manufacturing overhead allocation would be this times whatever the unit is (sqr ft, hours)

Conversion costs

Gauge efficiency in the production process. Conversion costs = direct labor + manufacturing overhead

Prime costs

Help set selling price to achieve required profits. Prime costs = direct materials + direct labor

Margin of safety

How much "cushion" does the company have before it will suffer a loss. Expressed in $ or %. The higher the $ or %, the lower the risk of not breaking even and incurring a loss. = Actual (or budgeted) sales - Breakeven sales

Contribution margin per unit =

Increase or decrease in NOI / increase or decrease in unit

Which of the following is not a COST CLASSIFICATION associated with decision making?

Indirect costs. Sunk costs are irrelevant but associated.

Manufacturing overhead =

Indirect materials + Indirect labor

________________ may be more concerned about what impacts them than what may be the best decision for the organization.

Individuals

Who are the decision makers outside the company?

Investors, banks, lenders, creditors, government agencies, regulators

Why does managerial accounting matter to your career?

It involves almost all types of business

Which statement best describes management accounting? 1. Management accounting is mainly focused on past results. 2. Management accounting reports are rules based using GAAP. 3. The main users of Management accounting information are outside the firm. 4. Management accounting reports are prepared following the National Management Accounting Standards (NMAS). 5. Management accounting is primarily used for decision making.

Management accounting is primarily used for decision making.

Gross margin - selling and administrative expenses =

Net income

Revenues - Costs =

Net operating income

Can non-manufacturing costs be prime or conversion costs?

No

Does it matter to commercial service which cost driver is used?

No, total cost shared does not change

Plantwide overhead vs. department overhead

Plantwide - 1 pool department - multiple pools

_____________ - _____________ = contribution margin - _____________ = NOI

Revenues; variable costs; fixed costs

Which of the following is false? 1. Prime costs are always direct costs. 2. Manufacturing costs can be direct or indirect. 3. Selling and administrative costs are only indirect. 4. Direct labor is both a prime cost and a conversion cost

Selling and administrative costs are only indirect.

Indirect materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Matching Principle

The accrual concept that costs incurred to generate revenue are expensed in the same period the revenue is recognized

What is managerial accounting?

The process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization's goals

Relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Do total manufacturing overhead costs vary?

Total manufacturing overhead costs tend to remain relatively constant due to the presence of fixed costs. Units produced fluctuate which causes the average cost per unit to vary.

Which cost driver (allocation method) is the right one to use?

Use the one that causes the expense

Why is it important to know direct and indirect costs?

We need all of the costs to determine the selling price for a markup and the minimum selling price before NOI is a loss.

Indirect labor

Work of factory employees that has no physical association with the finished product or for which it is impractical to trace the costs to the goods produced.

Does it matter to the project managers which cost driver is used?

Yes

Can manufacturing and non-manufacturing costs be direct or indirect?

Yes.

Goal: determine the total cost of product/service 1. _____________ costs to cost objects 2. ____________ for costs in a mfg company 3. ____________ financial statements 4. ___________ cost behavior 5. ____________ making

assigning; accounting; preparing; predicting; decision

The predetermined OH rate (allocation rate) is determined _________ actual numbers are known and is based on ___________ numbers.

before; estimated

WIP, FG, MOH, COGS

beg. WIP + DM + DL + MOH = end. WIP/FG/COGS

The term ______ is used in many ways in managerial accounting.

cost

Traditional income statements show ____________. Contribution statements show _____________.

cost function (classification) (product & period); cost behavior (variable & fixed)

Manufacturing costs

direct materials, direct labor, manufacturing overhead

Direct materials and direct labor are _____ costs and manufacturing overhead is ____________ cost.

direct; indirect

The contribution margin becomes profit after the _____________ are covered

fixed expenses

Organizational goals and individual goals are often _______________.

in conflict

The contribution margin income statement is only used ___________ the company to help.

inside

All product costs are also known as __________ or ____________ costs. What is a product cost? Product costs =

inventoriable; manufacturing. All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. = direct materials + direct labor + manufacturing overhead

Accountants help decision makers _________, ___________ , and ________ the costs and benefits of decision options.

measure, analyze, report

How are indirect costs (MOH) assigned to the product?

perform a cost allocation

If we understand costs, we can _________, have ___________, and ___________ _____________.

plan; control; make decisions

Manufacturing overhead applied =

predetermined overhead rate x actual amount of allocation base used by job

GAAP income statement provided to external decision makers is organized by _________ and ___________, not by cost behavior

product; period

TOTAL COSTS = ______________ costs (mfg) + _______________ costs (non-mfg)

product; period

The balance sheet reports ______________. The income statement reports ___________________________.

product; product (COGS) & period (SGAE)

Balance sheet reports only __________ costs. Income statement reports both __________ and __________ costs.

product; product (COGS); period (SG&A)

Non-manufacturing costs

selling costs and administrative costs

We have assumed that there is a ____________ companywide predetermined overhead rate. Large companies often use ____________ predetermined overhead rates to more accurately assign overhead costs

single; multiple

Opportunity cost

the value of the next best alternative