Managerial Accounting Ch 1, 2, 7 (Hilton)

activity accounting

AN important objective of a cost management system is to trace as many costs as possible directly to the activities that cause them to be incurred. This process is called this and is vital to management's objective to eliminating non-value-added costs.

Research and development costs

Costs of developing new products and services. A type of period cost. Eg. The costs of running new laboratories, building prototypes of new products, and testing new products

uncontrollable cost

Costs that a manager cannot influence significantly are classified as this.

sunk costs

Costs that have been incurred in the past. They do not affect future costs and cannot be changed by any current or future action.

out-of-pocket costs

Costs that require the payment of cash or other assets as a result of their incurrence.

Fixed cost estimate

Fixed costs = total costs - variable costs. Given y=b+mx where y=total costs b= fixed costs mx=variable costs.

Sales Mix

For any organization selling multiple products, the relative proportion of each type of produce sold.

Total Contribution Margin

Is defined as total sales minus total variable expenses. This is the amount of revenue that is available to contribute to covering fixed expenses after all variable expenses have been covered.

Total Contribution Margin

Is the difference between total sales revenue and total variable expenses. This use of the term contribution margin is a "total" concept rather than the "per unit" concept. Is the total amount left to contribute to covering fixed expenses after total variable expenses have been covered.

Cost Structure

Is the relative proportion of its fixed and variable costs. The greater the proportion of fixed costs in a firm's cost structure, the greater the impact on profit will be from a given percentage change in sales revenue.

Break Even Point

Is the volume of activity where the organization's revenues and expenses are equal. At this amount of sales, the organization has no profit or loss.

e-accounting

Managerial accountants are rapidly moving towards this by harnessing the power of online communications to streamline the procedures of managerial accounting.

attention directing function

Managerial accounting information often assists management through this feature. Managerial accounting reports rarely solve a decision problem. However, it often directs managers to an issue that requires their skills.

cost management system

Most companies have moved away from a historical cost accounting perspective and towards this. It is a management planning and control system with these objectives: 1. Measure the cost of the resources consumed in performing the organization's significant activities 2. Identify and eliminate non-value-added costs. 3. Determine the efficiency and effectiveness of all major activities performed in the enterprise 4. Identify and evaluate new activities that can improve the future performance of the organization

Practical capacity

Most managerial accountants believe that this is a more useful concept of capacity. This allows for normal occurrences, such as machine downtime and employee fatigue or illness.

Main difference between service and manufacturing industries

Most services are consumed as they are produced, unlike with manufacturing firms.

Control

One of the day to day duties of the management team. IT means ensuring that the organization operates in the intended manner and achieves its goals.

Decision making

One of the day to day duties of the management team. It entails choosing among the available alternatives.

Planning

One of the day to day duties of the management team. It means developing a detailed financial and operational description of anticipated operations.

Directing operational activities

One of the day to day duties of the management team. It means running the organization on a day to day basis. Eg. How many cashiers should be on duty Saturday morning? How much food should be ordered each day? How much cash will be needed to meet the payroll?

Decision-facilitating function

One of the functions of managerial accounting information. Information is usually supplied to a decision maker to assist that manager in choosing an alternative.

Decision-influencing function

One of the functions of managerial accounting information. Information is usually supplied to a decision maker to assist that manager in choosing an alternative. Often, that information is also intended to influence the manager's decision.

Management of capacity and capacity costs

One of the major themes of managerial accounting. A key objective of managerial accounting information is the management of an organization's capacity and the costs of providing that capacity.

costs and benefits

One of the major themes of managerial accounting. As is true with all goods and services, information entails both costs and benefits.

Evolution and adaption

One of the major themes of managerial accounting. The business world is constantly changing so managerial accounting information must be adapted to reflect those changes.

Behavioral issues

One of the major themes of managerial accounting. The reactions of both individuals and groups to managerial accounting information will significantly affect the course of events in an organization.

price down/cost down concept

One of the reasons for the need for continuous improvement. It refers to the tendency of prices to fall over the life cycle of a newly introduced product.

cost accounting system

One part of the overall accounting system. IT accumulates cost data for use in both managerial and financial accounting. Eg. Production cost data typically are used in helping managers set prices, which is a manegerial accounting use. However, production cost data also are used to value inventory on a manufacturer's balance sheet (financial accounting)

Kaizen costing

One widely used approach to cost reduction. It is the process of cost reduction during the manufacturing phase of an existing product.

average cost per unit

THe total cost, for whatever quantity is manufactured, divided by the number of units manufactured.

cost drivers

The activities that cause costs to be incurred. It is a characteristic of an activity or event that causes costs to be incurred by that activity or event.

differential cost

The amount by which the cost differs under two alternative actions

opportunity cost

The benefit that is sacrificed when the choice of one action precludes taking an alternative course of action.

empowerment

The concept of encouraging and authorizing workers to take the initiative to improve operations, reduce costs, and improve product quality and customer service. Eg. At Walt Disney Company theme parts, employees are routinely asked for suggestions about ways to improve service to the parks' millions of visitors.

continuous improvment

The constant effort to eliminate waste, reduce response time, simplify the design of both products and processes, and improve quality and customer service.

CFO (controller or comptroller)

The designation given to the top managerial and financial accountant. They are usually responsible for supervising the personnel in the accounting department and for preparing the information and reports used in both managerial and financial accounting. Often interprets accounting info for line managers and participates as an integral member of the management team.

total quality management (TQM)

The efforts of all the members in an organization directed to ensure that quality in the production of goods and services is achieved. One implication of JIT inventory is the need to emphasize product quality, so managerial accountants have become increasingly involved with this.

Activity Accounting

The emphasis of a cost management system on the organization's activities (seen in a cost management system). It is crucial to the goal of producing quality goods and services at the lowest possible costs.

Operating Leverage

The extent to which an organization uses fixed costs in its cost structure. Is greatest in firms with a large proportion of fixed costs, low proportion of variable costs, and the resulting high contribution margin ratio. To managerial accountants, refers to the ability of the firm to generate an increase in net income when sales revenue increases.

Overtime premium

The extra compensation paid to an employee who works beyond the time normally scheduled.

marginal cost

The extra cost incurred when one additional unit is produced.

Weighted Average Unit Contribution Margin

This is the average of several products' unit contribution margins, weighted by the relative sales proportion of each product. Example: Weighted-average unit contribution margin = ($6 x 90%) + ($10 x 10%) = $6.40 Breakeven Point = Fixed Expenses / Weighted-average unit contribution margin

Accounting system

This is the system of procedures, personnel, and computers used to accumulate and store financial data in the organization. Managerial and financial accountants both use this.

Cost-Volume Profit (CVP) Analysis

This technique summarizes the effects of changes in an organization's volume of activity on its costs, revenue and profits. Can be extended to cover the effects on profits of changes in selling prices, service fees, costs, income tax rates, and the organization's mix of products and services.

Idle time

Time that is not spent productively by an employee due to such events as equipment breakdowns or new setups or production runs. It is an unavoidable feature of most manufacturing processes. Cost of an employee's ______ is classified as overhead so it may be spread across all production jobs, rather than being associated with a particular production job.

Variable cost estimate

Total costs - fixed costs. Given y=b+mx where y=total costs b= fixed costs mx=variable costs.

Treasurer

Typically is responsible for raising capital and safeguarding the organization's assets. He/she is responsible for the organization's assets, the management of its investments, its credit policy, and its insurance coverage.

Activity based management (ABM)

Using an activity based costing system to improve the operations of an organization.

strategic cost management

Using cost management techniques to reduce the organization's costs and improve profit while supporting its value proposition. The process of managing cost relationships to the firms advantage.

bottle neck operation

a sequence of operations whose capacity is lower than that of the other operations

cross functional teams

A team composed of employees from different functional areas of the organization. If products are to be designed and manufactured with the customers' needs in mind, a cross functional approach is crucial Managerial accounting information is the glue that holds this team together.

Sensitivity Analysis

A technique for determining what would happen in a decision analysis if a key prediction or assumption proves to be wrong.

Variable costs

A type of cost behavior. It changes in total direct proportion to a change in the level of activity (or cost driver).

fixed cost

A type of cost behavior. It remains unchanged in total as the level of activity (or cost driver) varies.

Selling costs

A type of cost that includes salaries, commissions, and travel costs of sales personnel and the costs of advertising and promotion. It is a type of period cost.

Manufacturing overhead costs

A type of manufacturing cost. All other costs of manufacturing are classified as this. It includes three types of costs: 1. Indirect material 2. Indirect labor 3. Other manufacturing costs

Direct material costs

A type of manufacturing cost. It is raw material that is consumed in the manufacturing process. It is physically incorporated in the finished product, and can be traced to products relatively easily. Eg. Sheet metal in a subaru automobile

Flexible Manufacturing System

uses highly automated material-handling and production equipment to manufacture a variety of similar products.

Direct labor costs

A type of manufacturing cost. The cost of salaries, wages, and fringe benefits for personnel who work directly on the manufactured products. The cost of fringe benefits for direct labor personnel, such as employer paid health insurance premiums and the employer's pension contributions should also be included in this. Eg. Wages for personnel who assemble Comet computers

Other manufacturing costs

A type of manufacturing overhead cost. All other manufacturing costs that are neither material nor labor costs. These costs include depreciation of plant and equipment, property taxes, insurance, and utilities such as electricity, as well as the costs of operating service departments.

Indirect material

A type of manufacturing overhead cost. The cost of materials that are required for the production process but do not become an integral part of the finished product. Eg. The cost of the drill bits used in a metal fabrication department of Ford.

Indirect labor

A type of manufacturing overhead cost. The costs of personnel who do not work directly on the product, but whose services are necessary for the manufacturing process. Eg. Production department supervisors, custodial employees, security guards

Assembly line

A type of manufacturing process. A few major products; higher volume Eg. Ford

Continuous flow

A type of manufacturing process. High production volume; highly standardized commodity products. Eg. ExxonMobil.

Mass customization

A type of manufacturing process. High production volume; many standardized components; customized combination of components Eg. Dell Inc.

Job shop

A type of manufacturing process. Low production volume; little standardization; one of a kind products. Eg. Major film studios, such as 20th century Fox

Batch

A type of manufacturing process. Multiple products, low volume. Eg. Caterpillar

Just in time (JIT) production system

A type of production system where raw materials and parts are purchased or produced just in time to be used at each stage of the production process. This brings considerable cost savings from reduced inventory levels.

non value-added costs

Costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value.

Types of cost behavior

1. Variable costs 2. Fixed costs

Day to day work of the management team

1. Decision making 2. Planning 3. Directing operational activities 4. Controlling

Types of manufacturing costs

1. Direct Material 2. Direct labor 3. Manufacturing overhead

IMA's ethical principles

1. Honesty 2. Fairness 3. Objectivity 4. Responsibility

Themes of managerial accounting

1. Information and incentives 2. Behavioral issues 3. Costs and benefits 4. Management of Capacity and Capacity costs 5. Evolution and Adaption

Types of manufacturing (production) processes

1. Job shop 2. Batch 3. Assembly line 4. Mass customization 5. Continuous flow

Objectives of managerial accounting activity

1. Providing info for decision making and planning, and proactively participating as part of the management team in the decision making and planning process. 2. Assisting managers in directing and controlling operational activities 3. Motivating managers and other employees toward the organization's goals 4. Measuring the performance of activities, subunits, managers, and other employees within the organization. 5. Assessing the organization's competitive position, and working with other managers to ensure the organization's long run competitiveness in its industry.

Types of manufacturing inventory

1. Raw materials inventory 2. WIP inventory 3. Finished goods inventory

Roles of Managerial Accounting

1. Users: Managers within the organization 2. Regulation: Not required and is unregulated (since it is only intended for management) 3. Source of data: the organization's basic accounting system, plus various other sources 4. Nature of Reports and Procedures: Reports often focus on subunits within the organization; based on a combination of historical data, estimates, and projections of future events

Roles of financial accounting

1. Users: interested parties outside the organization 2. Regulation: Required and must conform to GAAP 3. Source of data: Almost exclusively drawn from the organization's basic accounting system., which accumulates financial information 4. Nature of reports and procedures: Reports focus on the enterprise in its entirety. (historical data)

Responsibility accounting

Cost management is sometimes facilitated by tracing costs to the department or work center in which the cost was incurred. Such tracing of costs to departments is known as this.

Product cost

A cost assigned to goods that were either purchased or manufactured for sale. This is used to value the inventory of manufactured goods or merchandise until the goods are sold. Includes direct materials, direct labor, indirect materials, and insurance on a manufacturing plant. Feeds COGS.

Direct cost

A cost that can be traced to a particular cost object is called a ____________ of that cost object.

indirect cost

A cost that is not directly traceable to a particular cost object.

Profit Volume Graph

A graphical expression of the relationship between profit and sales volume.

Information and Incentives

A major theme in managerial accounting. The need for information is the driving force behind managerial accounting. Managerial accounting information services two functions: decision-facilitating function, and decision-influencing function.

mass-customization

A manufacturing process/environment. In this environment, many standardized components are combined in different ways to produce custom-made products to customer order. Characterized by high production volum and often use a direct sales approach (customer orders directly from the manufacturer, often via the internet). Eg. Dell Inc. and Gateway

balanced scorecard

A model of business performance evaluation that balances measures of financial performance, internal operations, innovation and learning, and customer satisfaction. Like a pyramid: Learning and Growth, Internal Operations, Customers, and Revenue Key point is that by focusing on measures of performance now in these three key perspectives, a company can achieve its financial goals in the future.

Labor-Intensive Production Processes vs. Advanced Manufacturing Systems

A movement toward an advanced manufacturing environment often results in a higher break-even point, lower safety margins, and higher operating leverage. However, high-technology manufacturing systems generally have great throughput, thus allowing greater potential for profitability. Along with the increased potential for profitability comes increase risk. In an economic recession, for example, a highly automated company with high fixed costs will be less able to adapt to lower consumer demand than will a firm with a more labor-intensive production process.

intranet

A network designed for the exclusive use of computer users within an organization that cannot be accessed by users outside the organization

Institute of Managerial Accountants (IMA)

A professional organization for managerial accountants.

cost

A sacrifice made, usually measured by the resources given up, to achieve a particular purpose. However, different _____ concepts and classifications are used for different purposes.

cost drivers

Activites that cause costs to be incurred

Costs of Goods Sold

Add finished goods jan add COGM Deduct finished goods Dec

Cost behavior

After identifying costs and cost drivers for the business' operations, the cost driver team will then go on to examine the relationship of various costs to the activities performed.

Equation Approach

An alternative approach to finding the breakeven point. Profit is equal to sales revenue minus expenses. If expenses are separated into variable and fixed expenses, the essence of the profit (or income) statement is captured by the following equation: Sales Revenue - Variable Expenses - Fixed Expenses = Profit This equation can be restated as follows: [(Unit Sales Price) * (Sales Vol in Units)] - [(Unit Variable Exp) * (Sales Vol in Units)] - (Fixed Expenses) = Profit

Theory of constraints

An approach that seeks to find the most cost-effective ways to alleviate an organization's most limiting constraints. When binding constraints are relaxed, the organization can reach a higher level of goal attainment.

Cost object

An entity, such as a particular product, service or department, to which a cost is assigned.

e-budgeting

An example of e-accounting. This is now used by hundred of companies to quickly and effectively transmit the information needed to construct a budget from farflung business units around the globe.

Contribution Income Statement

An income statement on which fixed and variable expenses are separated.

multinational company

An organization that has operational subunits, such as maufacturing plants or sales facilities, in two or more countries.

inventoriable cost

Another term for product cost. Since a product cost is stored as the cost of inventory until the goods are sold.

Costs of Goods Available for Sale

BEGINNING COMPLETED GOODS INVENTORY + COST OF GOODS MANUFACTURED= COST OF GOODS AVAILABLE FOR SALE

e-business

Business processes that form the engine for modern business.

e-commerce

Buying and selling over digital media.

Gross Margin

Is computed by subtracting cost of goods sold from sales.

Cost-Volume Profit (CVP) Graph

Captures the relationship between profit and volume of activity.

Expense

Defined as the cost incurred when an asset is used up or sold for the purpose of generating revenue. The terms product cost and period cost are used to describe the timing with which various expenses are recognized.

Safety Margin

Difference between budgeted sales revenue and breakeven sales revenue.

What are conversion costs?

Direct labor and manufacturing overhead

Conversion costs

Direct labor and overhead are often called this, since they are converting raw material into finished products.

Prime costs

Direct material and direct labor are often referred to as this.

Traditional Income Statement

Does not disclose the breakdown of each expense into its variable and fixed components.

What is the most important difference between a manufacturing firm and service industry firm with regard to the classification of casts as product costs or period costs?

Goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced. Thus the cost incurred in manufacturing products are treated as product costs until the period during which the goods are sold. Most of the costs incurred in as service industry firm to produce services are operating expenses that are treated as period costs.

controllable cost

If a manager can control or heavily influence the level of a cost, then that cost is classified as this.

Cost of goods sold

In the period of sale, product costs are recognized as an expense called COGS. The product cost of merchandise inventory acquired by a retailer or wholesaler for resale consists of the purchase cost of the inventory plus any shipping charges.

Activity based costing (ABC)

In this system, the costs of the organization's significant activities are accumulated and then assigned to goods or services in accordance with how the activities are used in the production of those goods and services. This system helps management understand the casual linkages between activities and costs.

Service departments (support departments)

Included in other manufacturing costs in manufacturing overhead costs. They are departments that do not work directly on manufacturing products but are neccessary for the manufacturing process to occur. Eg. Equipment maintenance departments, computer aided design departments

Raw materials inventory

Includes all materials before they are placed into production. A type of manufacturing inventory.

Manufacturing Overhead

Indirect material Indirect labor Utilities: plant Depreciation: plant and equipment Other

Line positions

Positions in an organization that are directly involved in the provision of goods and services.

Staff positions

Positions in organizations are typically managers who supervise activities that support the company's overall mission, but they are only indirectly involved in operational activities. Eg. CFO, VP of government relations

Direct Material Schedule

Raw-material inventory, January 1 Add: Purchases of raw material Raw material available for use Deduct: Raw-material inventory, December 31 Raw material used

Administrative costs

Refer to all costs of running the organization as a whole. It is a type of period cost. Salaries of top management personnel and the costs of the accounting, legal, and public relations activities

Finished goods inventory

Refers to manufactured goods that are complete and ready for sale. A type of manufacturing inventory.

Work in progress (WIP) inventory

Refers to manufactured products that are only partially completed at the date when the balance sheet is prepared. A type of manufacturing inventory.

activity

Refers to the measure of an organization's output of products or services.

theoretical capacity

Refers to the upper limit on production of goods or services if everything works perfectly. This means that no employees miss time for illness, no machines break down, there are no unexpected interruptions such as power outages or severe storms, etc.

Internal auditor

Responsible for reviewing the accounting procedures, records, and reports in both the controller's and the treasurer's areas of responsibility

Unit Contribution Margin

Sales price minus the unit variable. The general formula for computing the breakeven sales volume in units is given below: Fixed Expenses / Unit Contribution Margin = Breakeven Point (in units)

operating expenses

Service industry firms generally refer to the cost of producing services as operating expenses. They are treated as period costs and are expensed during the period in which they are incurred.

Interdependent Changes in Key Variables

Sometimes a change in one key variable will cause a change in another key variable. Is usually due to these 3 factors: 1. A different unit contribution margin. 2. A different sales volume. 3. A difference in the net fixed expenses

Assumptions of CVP Analysis

The following important assumptions must be reasonably satisfied within the relevant range for any CVP analysis to be valid: 1. The behavior of total revenue is linear (straight line). This implies that the price of the product or service will not change as sales volume varies within the relevant range. 2. The behavior of total expenses is linear over the relevant range. This implies the following more specific assumptions. A.) Expenses can be categorized as fixed, variable, or semi variable. Total fixed expenses remain constant as activity changes, and the unit variable expense remains unchanged as activity varies. B.) The efficiency and productivity of the production process and workers remain constant. 3. In multiproduct orgs, the sales mix remains constant over the relevant range. 4. In manufacturing firms, the inventory levels at the beginning and end of the period are the same. This implies that the number of units produced during the period equals the number of units sold.

High-Low Method

The high-low method considers only two points of data, the highest and lowest, for activity within the relevant range. Use the same (x,y) when using this. Don't take just the lowest and the highest. Difference in Total Costs/ Difference in Activity

incremental cost

The increase in cost from one alternative to another is called this.

exchange rate

The price at which one country's currency can be converted into that of another country.

Managerial accounting

The process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization's goals. The focus on the the needs of managers within the organization.

Certified Management Accountant (CMA)

The professional certification to become a management accountant.

Target Profit (or Income)

The profit level set as management's objective.

RELEVANT RANGE

The range of activity within which management expects to operate during the period.

value chain

The set of linked, value-created activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services. Usually there are many organizations involved in this.

Cost of goods manufactured

The total cost of direct material, direct labor, and manufacturing overhead transferred from WIP inventory to finished goods inventory. Beginning Work-in-Process Inventory + Direct Material + Direct Labor + Manufacturing Overhead - Ending Work-in-Process Inventory

Contribution Margin Ratio

The unit contribution Margin divided by the unit sales price. The general formula for breakeven is given below: Fixed Expenses / (Unit Contribution Margin/Unit Sales Price) = Breakeven point in sales dollars

Capacity

The upper limit on the amount of goods or services that an organization an produce in a specified period of time.

financial accounting

The use of accounting information for reporting to parties outside the organization. Users of this information include current and prospective stockholders, lenders, investment analysts, unions, consumer groups, and government agencies.

Period costs

These costs are identified with the period of time in which they are incurred rather than with units of purchased or produced goods. Expensed as occured. Eg. All R&D, selling, and administrative costs, advertising True in manufacturing, retail, and service industry firms

constraints

Things that prevent an organization from reaching a higher level of achievement

Just-In-Time (JIT) production

an inventory management approach in which supplies arrive just when needed for production or resale

Operating Leverage Factor

is a measure, at a particular level of sales, of the percentage impact on net income of given percentage change in sales revenue. Multiplying the percentage change in sales revenue by this factor yields the percentage change in net income. Operating Leverage Factor = Contribution Margin / Net Inome