MBA Accounting Test 1

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Examples: - For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30% complete. How many equivalent units of production did Jones have for the period?

- 10,000 + (5,000 X0.3)=11,500

Expected Cash Disbursement for Materials: Patagonia pays 0.4 per pound of materials. One half of month's purchases are paid for in the month of purchase and the other half is paid the following month. - March 31 acounts payable balance is $12,000. Calculate expexted cash disbursements

- Accounts payable is $12,000 for April and 12,000 for the quater - April purhcases (50%X56,000[140,000X0.4])=28,000. Other 28,000 goes to May - Accounts payable for month is 68,000

Transferring Finshed Goods to Costs of Goods Sold: For GHQ 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.

- Accounts receivable: 225,000; sales=225,000 - Cost of finished goods sold=118,500. Finished goods=118,500.

Expected Cash Collections: All sales are on account. Royal's collection pattern is 70% collected in the month of sale and 30% collected in the month following sale. In April, the March 31st accounts recievable balance of $30,000 will be collected in full in April - April sales are 200,000 (70% collectd in month of and 30% collected in month prior)

- Accounts recievable as of 3/31 shows 30,000 for April and 30,000 for the quater - 140,000 are added to April and 60,000 are added to May. The quater is 230,000 - Same process for May and June, expect only 70% of June is added to quaterly budget - Sales budget complete

Advantages to high and low fixed cost

- An advantage of a high fixed cost structure is that income will be higher in good years compared to companines with lower fixed cost - Disadvatnage is the opposite. - Bottom line, Companines with low fixed cost structures enjoy greater stability across good and bad income years

Allocation Base

- An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. - Use allocation base because: 1. It is impossible or difficult to trace overhead costs to particular jobs 2. Manufacturing overhead consists of many different items ranging from machine grease to production manager's salary 3. Many types of manufacturing overhead costs are fixed even though output flucualtes throughout the period

Preparing Selling and Administrive Budget: At Royal, the selling and adminrtive budget is divided into variable and fixed componets - Variable and admin expenses are 0.5 per unit sold. - Fixed selling and adminsitative expenses are 70,000 per month - Out of the fixed cost, 10,000 are for things like deprecation that are not included as cash flows

- April: 20,000 x 0.5=10,000 variable selling and admin expenses - fixed expenses=70,000 - total selling and admin expenses= 80,000-noncash fixed epxense=70,000 - Do this for each month and you';ll arrive at total selling and admin epxenses for the quater

Assume the following for Royal: Maintains a 16% open line of credit for $75,000. Maintains a cash balance of 30,000. Borrows on the first day of the month and repays on the last day. Pays a cash dividend of $49,000 in April. Purchases $143,700 of equipment in May and $48,300 in June. Cash an April 1st cash balance of $40,000.

- April: Beginning cash balance is $40,000 +cash collections of 170,000 (from schedule of expected cash collections)=210,000 cash avaliable. - 210,000 - 40,000 materials - 13,000 direct labor -56,000 manufactoring overhead-70,000 selling and adminsistrative-49,000 dividend=228,000 disbursements= defeicntcy of 18,000. - Becuase of the cash balance of 30,000, they must now maintain 48,000 on their line of credit. - Ending cash balance is 30,000. In may, their is an excess of 130,500. The repayment of 48,000 + 1.920 interest (48,000 x16%X3/12=1,920) - Ending cash balance for May is 80,580

Job Order vs Process Costing (similarities)

- Both systems assign material, labor, and overhead costs to products and they provide a mechanism for computing unit proces costs - Both systems use the same manfucatoring accounts, including manufacturing overhead, raw materials, work in process, and finished goods - Flow of costs through the manufacturing accounts is basically the same in both systems

Assign Cost to Units Using Weighted Average method - Ending WIP inventory equivalent units is 540 for materials and 270 for conversion. - Cost epr equivalent unit is 21 for materials and 15 for conversion.

- Cost of ending work in progress inventory: (540 X 21=11,340) and (270 X 15=4,050). Total=15,390 - Units transferred: 5,400 - Cost per equivalent unit: 21 and 15. Cost of units transferred out: 5,400 X 21-113,400 and 5,400 X 15=81,000. Total=194,400

Assigning cost to cost objects

- Direct Cost: costs that can be easily and conveniently traced to a unit of product or other cost object. Ex. Direct Material and Direct Labor - Indirect Cost: Costs that cannot be easily and conveniently traced to a unit of product or other cost object . Ex. Manufacturing Overhead - Example of assigning cost to cost object: Nike fabric for direct material and direct labor at direct cost. Manufacturing overhead like oil, sewing machines, thread, etc are indirect cost

Direct Materials and Direct Labor; Manufacturing Overhead

- Direct Materials: raw materials that become an integral part of the product and that can be conveniently traced directly to it. Ex. Radio in automobile - Direct Labor: Labor costs that can easily be traced to individual units of product. Ex. wages paid to auto assembly line workers - Manufactoring Overhead: deprecation cost of manufacturing equipment, utility cost of plant, property taxes of plant, insurance premiums on the plant

Recording Labor Cost: Journal Entry: In April, the employee time tickets (provides hourly summaries of each employee's acitivtes throughout the day) included $60,000 recorded for direct labor and $15,000 for indirect labor.

- Entry one: 60,000 for work in process. 15,000 for manufacturing overhead. Salaries and wages payables=75,000

Calculating Equivalent Units

- Equivalent units= number of partially completed units X percentage completion - Equivalent units is the number of complete units that could have been obtained from the materials and effort that went into partially complete units - Ex. Assume Dept. A has 500 units in its ending work in process inventory that are 60% complete with respect to processing in the department. These 500 partially completed units are equivalent to 300fully completed units (500X60%=300). Department A's ending work in process inventory would contain 300 equivalent units for the period.

Financial vs Managerial Accounting

- Financial: concerned with reporting financial info to people outside the company - Managerial accounting: concerned with reporting financial info to management inside of a company

Transferring Completed jobs from work in process to finished goods: journal entry: Job A was completed during April and Job B was incomplete at the end of the month. Thus, the following entry transfer the cost of Job A from Work in Process to Finshed Goods

- Finshed goods=158,000 - Work in process=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.

From budgeted income statement, you can go to the budgeted balance sheet

- It had the prior account balances: 50,000 land, 150,000 common stock; 248,650 retained earnings, 175,000 equipemtn - Assets: 80,580 cash, + 90,000 accounts receiable + 4,600 raw materials inventroy (11,500 lbs X 0.4 lb) + 24,950 finshed goods inventroy (5,000 units X 4.99)_50,000 land +367,000 equipment=617,130 assets - Liabilites and stockholder's equity: 28,400 accounts payable (50% of June purhcases of 56,800) + 150,000 common stock + 438,730 retained earnings (248,650 + 239,080 net income -49,000 dividends= 438,730 ending balance) =617,130 total liablites and equity

Operation Costing

- Operation costing is a hybrid of job-order and process costing because it processes attributes of both approaches. - Operation costing is commonly used when batches of many different products pass through the same processing department.

Product Cost Flows

- Part One: Raw materials made during the period are added to beginning raw materials inventory. Ending raw materials inventory is deducted to arrive at the raw materials used in production. As items are removed from raw materials inventory and placed in production process, they are called direct materials and put under manfuactorring cost - Part Two: Direct Labor used in production and manufacturing overhead applied to production are added to direct materials to arrive at total manufacturing costs - Part 3: total manufacturing costs are added to the beginning work in process to arrive at total work in process for the period. - Part 4: Ending work in process inventory is deducted from the total work in process for the period to arrive at the cost of goods manufactured. - Part 5: costs of goods manufactured is added to the begging finished goods inventory to arrive at cost of goods available for sale. The ending finished goods inventory is deducted from this figure to arrive at cost of goods sold.

Recording Labor Cost: T Account

- Salaries and wages payable: direct labor goes to work in process (job cost sheet). Indirect labor goes to manufacturing overhead.

Sales Mix and Break-Even analysis

- Sales Mix is the relative Proprtion in which a company's products are sold - Different products have different selling prices, cost structures, and contribution margins - When a company sells more than one product, break-even analysis becomes more complex as the following example illustrates: Company sells two products, bikes and carts. Total contribution margin for both is 265,000 and total Sales for both is 550,000. Sales mix is 265,000/550,000=48.2% (INCOMPLETE)

Nonmanufactoring Cost

- Selling costs: costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect cost. - Administrative cost: all executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs

Nonmanufactoring cost: GHQ corporation incurred $30,000 in selling and admin salary costs during April. The following entry summarizes the accrual of those salaries.

- Selling expnses=30,000; salaries and wages payable=30,000 - Deprecation on office equipment: Deprecation on office equipment in April was $7,000. 7,000 deprecation expenses and 7,000 accumulated deprecation. - Advertising was 42,000 and other selling and administrative epxnes in April total 8,000. Following entry records this: Advertising expenses=42,000 other selling and admin epxense= 8,000. Accounts payable=50,000.

CVP Relationships in Graphic Form (CVP graph)

- Shows a Contribution margin income statement with 0 units, 200, 400, and 600 units sold. 0 has an 80,000 loss, a 40,000 loss for 200, breakeven at 400, and a 40,000 profit at 600 - Unit volume is on the horizontal axis and dollars are on the vertical axis - A separate flat line represents fixed expenses. A third line intersects the two at the break-even point. The area above it is the profit area and the area below it is the loss area

Information to calculate multiple predetermined overhead rates: 780 Inc has two production departments, raw materials and assembly. Company uses a job-order costing system and computes a predetermined overhead rate in each production department. The predetermined rate in the raw materials department is based on direct labor hours and the predetermined rate used in assembly department is machine hours. Company uses cost-plus pricing (and a markup percentage of 75% of total manufacturing cost) to establish selling prices for all its jobs. Variable manfuactroing overhead cost per machine hour=2. Variable manufacturing overhead cost per direct labor hour=3.75

- Step One: During the current month the company started and completed job final project. It wants to use its predetermined overhead costs and rate for the raw materials and assembly departments. Raw materials dept: $390,00 + ($2 X 60,000 labor hours); assenbly=500,000 +(3.75 X 80,000 MH's)=800,000 2. Use the amounts determined to calculate the predetermined overhead rate of each dept: 510,00/60,000 machine hours=$8,50 per DL; 800,00/80,000=10per MH 3. Overhead applied from both departments: 8.50 X90=765; 20 X $10=200 4. Total cost of job: 965 manufacturing overhead + 1,170 DM + 350 DL=2,485 5. Selling Price at a 75% markup: total cost (2,485) + markup (2,485X0.75=1,863.75)= 4,348.75

Purchase of Raw Materials T Accounts

- T account divides raw materials into direct and indirect materials. - Actual indirect mateials goes to manufactoring overhead - Direct materials goes to Work in Process

Direct Labor costs are often small in comparison to the other product costs in process costs systems

- Therefore, direct labor and manufacturing overhead are often combined into one classification of product cost called conversion costs.

Budgeting Example: Patagonia is preparing budgets for the quater ending June 30th. Budgeted sales for the next 5 months are: 20,000 units for Aprl, 50,000 for May, 30,000 for June, 25,000 for July, and 15,000 for August. Selling price is $10 per unit -

- Total budgeted sales for each April may and June are: $200,000, 500,000, 300,000. For the quater its 1,000,000

Target profit analysis Formula Method

- Unit sales to attain target profit= target profit +fixed expenses/CM per unit - In terms of dollars: dollar sales to attain target profit=target profit +fixed expenses/CM ratio=100,000+80,000/40%=450,000

Variable Expense Ratio

- Variable Expense Ratio: Variable Expenses/Sales -$120,000/$200,000=60% - CM ratio is related to variable expense ratio as follow: 1- Variable expose ratio. Ex. 1-60%=40%

Compute the cost per unit using weighted average method (Part One): - Beginning work in process inventory: 300 units - Materials: 40% complete ($6,119) - Conversion: 20% complete ($3,920) Production started during June: 6,000 units - Production completed during June: 5,400 units Cost added to production in June: Materials cost: $118,621 Conversion cost: $81,130 Ending Work in Process inventory (900 units) Materials: 60% complete Conversion: 30% complete

- Weighted Average Formula for computing cost per equilvanet unit: Cost of beginning work in process inventory + cost added during period/equivalent units of production - Total cost as of June last =10,039; MAterials=6,119; conversion=3,920 - Cost added in Assembly: Total cost = 199,751 (118,621 materials +81,130 conversion) - Total cost: 124,740 for materials and 85,050 for conversion - Equivalent units for materials (5,940) and 5,670 for conversion - Cost per equivalent unit: 21 for materials and 15 for conversion. Cost per equivalent unit =36.

Transfer of Product Costs

- When direct materials are used in production, their costs are transferred from raw materials to work in progress. - Direct labor and manufacturing overhead costs are added to work in progress to convert direct materials into finished goods - Once completed, costs are transferred from work in process to finished goods - When a manufacturer sells its finished goods to customers, it becomes cost of goods sold

Applying Manufacturing Overhead costs to work in process journal entry: Assume that Rurger's 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 (total of 15,000 machine hours). Thus, 90,000 in overhead cost ($6 per machine hour X 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 porcess=90,000. On the other side of entry: manufacturing overhead=90,000.

NC Zeta 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 manufacotirng overhead at $200,000 and variable manufacturing overhead costs $2.75 per direct labor hour.

- Y=ax+b - Y=200,000 + ($2.75 per direct labor hour X 160,000 labor hours) - Y=$640,000 - POHR= 640,000 total manufacroing overhead/160,00 esimtated direct labor hours= $4.00 estimated per direct labor hours

Fixed costs and the relevant range

- relevant range of activity pertains to fixed and variable cost - Ex. Office space is available at a rental rate of $30,000 per year in increments of 1,000 feet. Fixed cost would increase at a rate of $30,000 for each additional 1,000 square feet. - The relevant range of activity for a fixed cost is the range of activity over thwack the graph of the cost is flat

Multiple overhead rate: an activity-based approach

- when a company creates overhead rates based on activities that it performs, it is employing an approach called activity-bred costing - Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Used by mangers to more accuratelyy measure the demands that jobs, products, customers, and other cost objects make on overhead resources

5 Purposes of Cost Classification

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

Compute the equivalent units of production using the weighted average method: Smith Company reported the following activity in the Assembly dept for the month of June - Work in process (June 1st): 300 units, 40% material, 20% conversion - Units started into production in June: 6,000 - Units completed and transfer out of dept in June: 5,400 - Work in process (June 30): 900 units, 60% materials, 30% conversion

1. Calculate the equilvanet units completed and transferred out of department in June: 5,400 2. Identify the equivalent units of production in ending work in process with respect to materials for the month and add to units complete and transferred out: 900 X60%=540. 540_5,400=5,940 3. Identify equivalent units of production in ending work in process with respect to conversion for the month (270 units) and adding this to the 5,400 units: 900X30%=270 +5,400=5,670

Prepare a cash budget: Divided into four sections

1. Cash reciepts: includes all cash inflows, exlcuding cash recieved from financing 2. Cash disbursements: includes all cash outflows, exlcuding payments of principal and interest 3. Cash excess or deficentcy: determines if the company needs to borrow money or it will repay funds previosuly borrowed 4. Financing: details the borrwoing and repayments projected to take place during the budgeting period.

Job-Ordering Costing: Cost Flow One; Cost Flow 2; Job Cost Sheet

1. Charge direct materials and direct labor cost to each job as work is performed 2. Manufactoring overhead (inlcuding indirect materials and indirect labor) are allocated to all jobs rather than directly traced to each job - Job Cost Sheet: includes direct materials, direct labor and manufacturing overhead.

Types of fixed costs

1. Committed: long-term, cannot be significantly reduced in the short term. 2. Discretionary: may be altered in the short-term by current managerial decisions

- In process costing, each department needs to calculate two numbers for financial reporting purposes

1. Cost of its ending work in process inventory 2. Cost of completed units transfer to the next stage of production process. - Key to delivering these two numbers is calculating unit costs within each department. - Two methods for performing the computations: weighted average and FIFO

Purchase of raw materials journal entry: On April 1st, GHQ corporation had 7,000 in raw materials on hand. During the month, the company purchased on account an additional $60,000 in raw materials. - During April, materials requisition forms were prepared to authorize $52,000 in raw materials from the store room to use in production. These raw materials included $50,000 of direct and $2,000 indirect materials.

1. Entry one: 60,000 in raw materials and 60,000 in accounts payable. 2. Entry two: 50,000 in work in process and 2,000 in manufacturing overhead. 52,000 to raw materials.

Flow of Raw Materials costs: T account; Flow of labor T accounts

1. Raw Materials: direct materials go to work in process department A and Work in Process department B 2. Salaries and wages payable: direct labor goes to direct labor in work process depamrtnet A and B - Same for manufacturing overhead - Work in process department A (DM, DL, applied overhead) is transferred to - Cost of goods manufactured in Work in PRoces Department B is transferred to finished goods - From finished goods it becomes cost of goods sold

CVP: Change in fixed cost, selling price, and sales volume Impact if Tomorrowland Speedway: 1. Cuts its selling price to $20 per unit 2. Increases its advertising budget by 15,000 per month and 3. Increases sales from 500 to 650 units per month

1. Sales 650 X 20=312,000 2. Variable Expenses: 195,000 3. Contribution margin: 117,000 4. Fixed expenses: 95,000 5. Net operating income: 22,000 Sales increase by 62,000, fixed cost increase by 15,000, and net operating income increases by 2,000

Assumptions of Cost-Volume-Profit Analysis

1. Selling price is constant. Price of a product won't change with volume 2. Costs are linear and can be accurately divided into variable and fixed components 3. In multiprodcut copanines, the mix of products sold remains constant

When are job costing systems used?

1. When many different products are produced each period 2. Products are manufactured to order 3. Unique nature of each job requires tracing or allocating costs to each job and maintaining cost records of each job - Examples of companies that would use job-order costing: boeing (aircraft manufacturing); bechtel (large scale construction); Walt Disney movie production

Weighted average method

A) This method makes no distinction between work done in prior and current periods. It blends together units and costs from the prior and current periods. B) The equivalent units of production for a department are the number transferred to the next department (or finished goods) plus the equivalent units in in the department's ending work in process inventory

From the cash budget, you go to the budgeted income statement

After getting net operating income, deduct the 1,920 interest expense

Product Cost

All costs that are involved in acquiring or making a product - Product costs are attached to a unit as it is purchased or manufactured and stays attached to it as long as it stays in inventory and isn't sold (then it becomes cost of goods sold) - Product costs for manufacturing companies: raw materials (any materials that go into final product), work in progress (units of a product that are only partially complete and will require further work before they are ready for sale to the final customer), finished goods cost (completed units of a product that have not been sold to customers)

Processing Departments

Any unit in an organization where material labor or overhead are added to product - Activites performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogenous. Products in a process costing environment typically flow in a sequence from one department to another.

Prepare a Cost Reconciliation Report

Assembly Department Cost Reconciliation Report - Cost to Be Accounted For: Cost of beginning work in process inventory: $10,039 - Costs added to production during the period: $199,751 - Total costs accounted for: 209,790 (15,390 ending work in process; 194,40 cost of units transferred out)

Applications of CVP concepts: change in Fixed Costs and Sales Volume. - What is the profit impact if RBC can increase unit sales from 500 to 540 by increasing the monthly advertising budget to 10,000?

At 500 units, net operating income was $20,000. At 540 units... - 270,000 sales (versus 250 before)-162,000 variable expenses (150 before)=108,000 contribution margin. Fixed expenses are 90,000 (as opposed ot 80,00) before. Net operating income is now 18,000.

Manufactoring overhead budget: Manufactoring overhead is applied to products based on direct labor hours. Variable manufactoring overhead rate is $20 per DL hour. Fixed manufactoring overhead is $50,000 per month which includes $20,000 of noncash costs (primarily deprecation of plant assets). Prepre manufactoring overhead budget

Budgeted DL for April is 1,300. - 1300 X 20 variable overhead rate=26,000 manufactoring overhead costs +50,000 fixed cost=76,00 total manufactoring cost-20,000 noncash cost=56,000 cash disbursement for OH

Mixed Costs

Contains both variable and fixed elements. Ex. Utility cost has fixed monthly charges and varies per kilowatt - Uses formula Y=ax +b

Contribution Margin Ratio

Contribution Margin as a percentage of sales is referred to as the CM ratio. This ratio is computed as follows: CM ratio=Contribution Margin/Sales - Ex. CM ratio: 80,000/200,000=40%. For each 1.00 increase in sells results in a total contribution margin increase of 40 cent - Can also be expressed as contribution margin per unit/selling price per unit.

Application of Contribtion Margin Ratio: What if Tomorrowland Speedway increases sales from 400 to 500 bikes ($50,000)...

Contribution Margin increases by $20,000 (50,000X40%)=20,000 increase in Contribution Margin

Cost Classifications for Predicting Cost Behavior

Cost behavior refers to how a cost will react to changes in the level of activity. - Most common cost classifications: 1. Variable cost: cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost per unit is constant 2. Fixed cost: cost that remains constant, in total, regardless of changes in the level of activity. If expressed on a per unit basis, the average fixed cost per unit varies inversely with change in activity. 3. Mixed cost:

Cost structure and profit stability

Cost structure refers to the relative proportion of fixed and variable costs in an organization

Cost Classifications for Decision Making

Decisions involve choosing between alternatives. The goal of decision making is to identify those cost that are relevant or irrelevant to the decision - Differential cost: aka incremental cost. The difference in cost between any two alternatives - Opportunity Cost: potential benefit that is given up when one alternative is selected over another. Not usually found in accounting records. - Sunk costs: cost that have been incurred already and should be ignored when making decisions

Undersupplied and Overapplied Overhead

Difference between overhead cost applied to Work in Process and actual overhead cost of a period if referred to as either undersupplied and over applied overhead - Undersupplied: exist when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actuallyy incurred in the period. - Overapplied: exist 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 in the period.

Ending Finshed Goods Inventory Budget

Direct Materials (5 lbs X 0.4 per unit) + DL (0.05X10) + Manufactoring OH (0.05 X 49.70)=$4.99 total - Unit product cost is 4.99. Endign invnetory in units is 5,000 (production budget). Ending ifnshed goods inventory=24,950 - ** Total Manufactroing OH for quater (251,000/Tota; labor hours required 5,050)=49.70

Break-even analysis

Equation and formula methods that can be used to determine the unit sales and dollar sales needed to achieve a target profit of 0. - Profit=UnitsXCM-Fixed expenses - 0=unitsXCM-fixed expenses - 0=200XQ-80,000 80,000/200=Q - 400 units Also: - Fixed expsnses/unit CM=400 units - Compute dollar sales to break-even: (fixed expenses/CM ratio) - 0=40%Xsales-80,000 - 80,000/40%=200,000

Direct Labor Budget: At Royal, each unit of product requires 0.05 hours (3 minutes) of Direct Labor. Royal pays its workers at the rate of $10 per hour. Prepare Direct labor budget

Ex. April has 26,000 units of production. Direct labor reqired for April is 1,300) - 1300X10=13,000 DL cost

Cost-Volume-Profit Basics: Contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. Empathsis on Cost behavior

Ex. Tomorrowland Speedway Contribution Income Statement for the month of May - Sales (500 race cars): $250,000 (500 per unit) - Less: 150,000 variable expenses (300 per unit) - Contribution margin: 100,000 (200 per unit) - Less: Fixed Expenses: 80,000 - Net Operating Income: 20,000 - If Tomorrowland Speedway sells 400 units in a month, it will be at the Break-Even Point (because this will give a 80,000 contribution margin). If it sells 401 bikes, its net operating income will increase by $200. - An income statement doesn't need to be prepared to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit (ex. If TS sells 430 race cars, its net operating income will be $6,000

After Sales budget...production budget Management at Patagonia want ending inventory to be equal to 20% of the following month's budgeted sales - On March 31st, 4,000 units were on hand

For April, its 20,000 budgeted sales + 10,000 desired ending inventory (50,000 budgeted may sales X 20%=10,000 desird ending inventoy- 4,000 begininng inventory ()march 31st beginning inventory)= 26,000 required produciton for April - When you do this process for May, beginning inventory is 10,000

Direct Materials Budget: At Patagonia 5 lbs of material are required per unit of product - Management wants materials on hand at the end of each month equal to 10% of the following month's production - On March 31, 13,000 pounds of material are on hand. Material cost is 0.4 per pound.

For April, production is 26,000 X 5 materails per unit=130,000. Add desired ending inventroy of 23,000 (10% of desired ending inventory)= total needed is 153,000. 153,000- beginng inventory=140,00 materials to be purchased - Ending inventory for May is 23,000

Computing Predetermined Overhead Rate

Four-step process: 1. Estimate the total amount of the allocation base that will be required for next period's level of production 2. Estimate the total fixed manufacturing overhead cost for the coming and the variable manufacroing overhead cost per unit of the allocaiotn base 3. Use the following equation to estimate the total amount of manufacturing overhead: Y= Ax+b - Y=estaimted total manufcroing overhead - A=estiamted total fixed manufactoring overhead cost - b=estimated variable manufacturing overhead cost per unit of the allocation base - x=estamted total amount of the allocation base 4. Compute predetermined overhead rate

Disposition of Overapplied and Undersupplied Overhead: assume overhead applied in ending work in process inventory, ending finished goods inventory, and costs of goods sold is $68,000, $204,000, and $408,000. (total value of accounts is 680,000)

In this case, allocation for work in process, finished goods, and costs of goods would be: - Ending WIP inventory: 68,000/680,000=10% - Ending Finshed goods inventory: 204,000/680,000=30% -Costs of goods sold: 408,000/680,000=60% - Allocation of 30,000 over applied overhead would be 3,000 to finished goods, etc

Inaccurately assigning manufacturing cost

Inaccurately assigning manufacturing costs to jobs adversely influences planning and decisions by managers. 1. Job-order costing systems can accurately trace direct materials and direct labor to cost of jobs 2. Job order costing systems often fail to accurately allocate the manufacturing overhead costs used during the production process to their perspective jobs - Job-order costing systems often use allocation bases that do not reflect how jobs actually use overhead resources. The allocation base in the predetermined overhead rate must drive the overhead cost to improve job cost accuracy. Cost driver is factor that causes overhead costs - Many companies use a single predetermined plant wide overhead rate to allocate all manufacturing costs to jobs based on their use of direct labor hours. This is often too simplistic. Job cost accuracy is improved by using multiple predetermined overhead rates

Job order vs process costing

Job order costing: 1. Many different jobs are worked on during each period, with each job having unique production requirements 2. Costs are accumulated by individual jobs 3. unit cost are computed by job on cost sheet Process Costing 1. A single product is produced either on a continuous basis or for long periods of time. All units of product are identical 2. Costs are accumulated by department 3. Unit cost are computed by department

Assume GHQ corporation incurred the following general factory costs during April: 1. Utilites (heat, water, and power): $21,000 2. Rent on factory equipment: $16,000 3. Mischallenous factory overhead costs: 3,000

Manufactoring overhead=40,000. Accounts payable=40,000. - Manufactoring overhead t chart is split into actual and applied. Indirect materials, indirect labor, and other overhead are part of actual manufacturing overhead. Overhead applied to work in process is part of the applied side...this corresponds to overhead applied under direct materials and direct labor on the job cost sheet.

Prime and Conversion Cost

Manufacturing cost are often classified as follows: 1. Prime cost: Direct material and direct labor 2. Conversion cost: Direct labor and manufacturing overhead

Overhead application: Weylan Yutamni's actual overhead for the year was 650,000 with a total of 170,000 direct labor hours worked on jobs. Waylay-yutamni's predetermined overhead rate is $4 per direct labor hour.

Overhead applied during the period: - Applied overhead=POHR X actual direct labor hours...680,000. Over applied by 30,000. - Any remains balance in manufacroing overhead is disposed of in one of 2 ways: 1. 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.

Predetermined Overhead Rate

PDOR used to apply overhead to jobs is determined before the period begins - POHR: Estimated total manufacturing overhead cost for the coming period/estaimted total units in allocation base for the period - Ideally allocation base is cost driver that causes overhead - Predetermined overhead rates that rely upon estimated date are often used because actual overhead for the period is not known until the end of the period (thus inhibiting the ability to estimate job cost during the period) and actual overhead costs can fluctuate seasonally (thus misleading decision makers)

Job cost sheet: Job Cornhole board at NC Zeta 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 wre 20,000. What would be recorded as the cost for the job?

POHR - Y=ax+b - 760,000/20,000 - $38 Direct materials: $200 Direct Labor: $15X10=150 Manufacturing overhead: 38X10=380 Total cost: 730

Target Profit Analysis: Equation Method

Profit= Unit CM X Q-Fixed expenses - Ex. Tomorrowland Speedway's management wants to know how many bikes must be sold to earn a target profit of $100,000 - Profit=CM X Q-fixed expenses - 100,000=200XQ-80,000 - 200XQ=180,000 Q=900 If wanted it in sales dollars instead of quantity sold: - Profit= CM ratio X Sales - Fixed Expenses - 100,000=40%Xsales-80,000 - Sales=450,000

CVP Relationships in Equation Form:

Profit=(sales-variable expenses)-fixed expenses - Ex. ($500X401)-(300X401)-80,000 - Can also be expressed as: Unit CMXQ-Fixed Expenses

If Tomorrowland Speedway increased its sales volume to 500 racecars, what would management expect profit or net operating income to be (Contribution margin is 40%, sales are 250,000, and fixed epxenses are 80%)

Profit=Contribution margin - fixed income - (40%X250,000)-80,000 - 20,000

Order of Budgets

Sales Budget - then production budget, then cash and ending invnetory budget and (DL, DM, and OH), then cash budget, then budgeted income statements and balance sheets - then selling and adminsistrtive budget

Additoinal Applications of CVP concepts: Change in Variable Costs and Sales Volume: 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: 290,000 Variable expenses: 179,800 Controbution margin: 110,200 Fixed expenses: 80,000 Net operating income: 30,200

Schedules of costs of goods manufactured and costs of goods sold

Schedule contains 3 types of costs: 1. Direct materials 2. Direct Labors 3. Manufactoring Overhead - Schedules calculate: 1. Cost of raw material and direct labor used in production and the amount of manufacturing overhead applies to production 2. Manufacturing costs associated with goods that were finished during period.

Target Profit Analysis

Target profit analysis is estimating sales volume needed to achieve a target profit - Can use either: 1. Equation method 2. Formula Method

Margin of Safety in Dollars

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. - Margin of safety in dollars=total sales- break even sales - Margin of safety in units=actual sales units-break-even units

Operating Leverage

The measrure of how sensetive net operating income is to % change in sales. It is a measure, at any give level of sales, of how a % change in sales volume will affect profits - Degree of operating leverage=Contribution margin/net operating income - Ex. If a company has an operating leverage of 5, RBC increases its sales by 10% would have an increase in net operating income of 50%

Equivalent units

The number of partially completed units and the percentage completion of those units - Equivalent units need to be calculated because a department usually has some partially completed units in its beginning and ending inventories. These partially completed units complicate the determination of a department's output for a given period, and the unit cost that should be assigned.

Traditional and Contribution formats

Traditional (used primarily for external reporting): Sales (-) COGS = gross margin (-) Selling and administrative expenses = net operating income Contribution Format (used by management): Sales (-) Variable Expenses = contribution margin (-) fixed expsnses = net operating income

Period cost

all selling and administrative costs


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