Managerial Accounting Textbook Notes + Q&As

Activity-based costing (ABC)

A method of allocating overhead based on each product's use of activities in making the product.

Period Costs

All selling and administrative expenses are treated as period costs

Chapter 1 Questions

A type of indirect cost incurred to benefit more than one cost object is a(n) ______ cost. common Cost objects include ______. anything for which cost data is desired customers organizational subunits Costs that are shared by multiple cost objects in a company are known as ______ costs. common Prime costs include ______. direct labor direct materials Factory costs such as cleaning supplies, taxes, insurance, and janitor wages are classified as ______. manufacturing overhead Indirect labor costs include ______. factory security guard wages assembly-line supervisor salary Manufacturing overhead costs include ______. indirect materials, factory supervisors' salaries, and factory depreciation Other names for manufacturing overhead include ______. factory overhead indirect manufacturing costs factory burden True or false: All of a company's depreciation, property taxes and insurance premiums are considered manufacturing overhead. False - Reason: Only indirect costs associated with operating the factory are included in manufacturing overhead. Administrative costs include ______. executive compensation and public relations costs Direct labor and overhead costs incurred to change raw materials into finished products are known as Conversion costs The accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized is known as the Matching Principle Inventoriable costs is another term for manufacturing or product costs Units that are partially complete are found in ______. Work in Process Which of the following statements are true? Period costs do not flow through the inventory accounts. Period costs are expensed when incurred. How individual costs react to changes in activity level is referred to as cost Behavior The relative proportion of each type of cost in an organization is known as the company's Cost Structure Cost of goods sold for a merchandising company, direct materials and commissions are all examples of Variable Costs Cost behavior ______. categorizes costs as fixed, mixed and variable refers to how a cost will change as activity level changes An activity base ______. is sometimes called a cost driver measures whatever causes costs to vary Product costs ______. are also called inventoriable costs "attach" to units of product as they are purchased for resale or produced Common activity bases include ______. units sold machine hours direct labor hours units produced Committed fixed costs include ______. real estate taxes top management salaries Fixed costs that can be cut-back or eliminated without significant damage to a company's long-term goals are __________ fixed cost and _________ fixed costs can not be easily changed or eliminated. Blank 1: discretionary or managed Blank 2: committed Which of the following are most likely fixed costs? Administrative salaries Factory rent Factory insurance Within the relevant range of activity ______. costs and activity can be approximated by a straight line fixed costs remain constant in total Within the relevant range, fixed costs ______. generally include rent and supervisor salaries remain constant in total regardless of changes in activity should not be expressed on a per unit basis when making decisions Cost behavior patterns such as salaried employees are often called step-variable costs A cost that contains both variable and fixed costs elements is called a(n) mixed cost Step-variable costs ______. can be adjusted quickly as conditions change may include total salaried employee expense Which of the following is not a COST CLASSIFICATION associated with decision making? Indirect costs Differential costs are also known as incremental, relevant, or decremental costs The difference in costs between two alternatives is called a(n) incremental cost An income statement focusing on product and period costs has been prepared using a(n) ____________ format, while a(n) _____________ format income statement makes a distinction between fixed and variable costs. Blank 1: traditional or GAAP Blank 2: contribution Based on the following information, calculate net income for Dana's Dress Shop using the traditional format. Sales $360,000 Gross Margin $140,000 Contribution Margin $110,000 Total Selling & Administrative Exp. $60,000 $80,000 - Reason: Gross Margin of $140,000 - Total Selling & Admin. Exp. of $60,000 = $80,000. A contribution approach income statement ______. separates costs into their fixed and variable components can assist with management decision making Which of the following are differences between the traditional and contribution format to income statements? - Traditional income statements focus on cost classifications. Contribution format statements focus on cost behavior. - Compared to traditional statements, contribution format statements provide management with a tool to make decision-making easier. On a traditional income statement, cost of goods sold reports the product costs attached to merchandise sold during the period, while selling and administrative expenses report all period costs that have been expensed as incurred.

Calculating Degree of Operating Leverage

Contribution Margin / Net Operating Income

Raw Materials Account

Raw materials include any materials that are used in production—both direct and indirect.

Production Budget

Units to be Produced = Budgeted Sales + Ending Finished Goods - Beginning Finished Goods

Managerial accounting ______.

emphasizes relevance reports to managers inside the organization emphasizes the future is not mandatory

CVP Calculations (Assumptions & Estimating Profit Factors)

in figure

Calculating Net Operating Income Change based on allocating to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold?

in figure

Managerial Accounting

is concerned with providing information to managers for use within the organization - managerial accounting emphasizes decisions affecting the future, relevance, timeliness, and segment performance. - Managerial accounting helps managers perform three vital activities (the three pillars): planning, controlling, and decision making.

Perhaps the most basic managerial skill is the ability to ______.

make intelligent decisions

Margin of Safety Percentage

margin of safety in dollars / total budgeted (or actual) sales in dollars

Margin of Safety in Dollars

total budgeted (or actual) sales - break even sales

CVP Graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.

An exam that focuses on planning, controlling and decision-making skills is required to become a(n) ______.

CMA

contribution margin per unit

Contribution Margin Per Unit = Total Contribution Margin ÷Total Units Sold

Calculate Goods Available for Sale

Goods Available for Sale = Costs of Goods Manufactured + Beg. Finished Goods Inventory

Chapter6 Questions

For external reporting, income statements are generally prepared using ___ costing, and ___ costing is used for internal decision making purposes. Absorption, Variable A part or activity within an organization about which managers would like cost, revenue or profit data is called a(n) segment Absorption and variable costing net income are usually different due to the accounting for ______. fixed manufacturing overhead Under absorption costing product costs consist of ______. both variable and fixed manufacturing costs Net operating income is less under absorption costing than under variable costing when inventory for the period ______. decreases A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n) Common Fixed Cost from a decision point of view, ______________ margin is most useful for major capacity decisions and _____________ margin or short-term sales volume decisions Segment, Contribution Segment margin is most useful in decisions involving short-run changes in sales volume such as pricing special orders. False - Contribution margin is most useful in decisions involving short-run changes in sales volume such as pricing special orders. Segment margin is most useful in major decisions that affect capacity such as dropping a segment. When a segment is eliminated, a ______. traceable fixed cost will disappear common fixed cost will remain unchanged Dollar break-even for a company is calculated as ______. (Traceable fixed expenses + Common fixed expenses) ÷ Overall CM ratio Segmented income statements ______. may be prepared for activities at many levels in a company SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by ______. $11,000 - Reason: Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000. When preparing a segment margin income statement ______. traceable fixed expenses are deducted from contribution margin cost of goods sold consists of only variable manufacturing costs When calculating the profit impact of discontinuing a segment, consider _____. the segment's contribution margin the segment's traceable fixed costs Because nonmanufacturing costs are not included as costs of a product, the use of _________ costing can lead to the omission of segment costs. Absorption Segment break-even calculations include ______ fixed expenses. only traceable Using absorption costing for segmented income statements can lead to ______. under-costing of segments omission of upstream and downstream costs Incorrectly or arbitrarily assigning common costs to segments ______. holds managers responsible for costs they cannot control could reduce the overall profits of the company distorts the profitability of segments Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of absorption costing Advocates of variable costing believe fixed manufacturing costs ______. are period expenses are not caused by and cannot be meaningfully traced to specific units of production GAAP and IFRS rules ______. create problems in reconciling internal and external reports require that the same method be used for both internal and external segment reporting require segmented financial data be included in annual reports

Formula for determining the amount of overhead cost to apply to a particular job (but when the allocation base is direct labor-hours)

Overhead applied to a particular job = Predetermined overhead rate X Actual direct labor-hours worked on the job

Calculating Predetermined Overhead Rate

Predetermined Overhead Rate = Estimated total manufacturing overhead cost / Estimated total amount of the allocation base

CVP Profit Equation

Profit = (P × Q) - (V × Q) - fixed expenses Profit = (selling price per unit × quantity sold) - (variable expense per unit × quantity sold) - fixed expenses

Calculate Segement Margin

Segment Margin = Contribution Margin Margin - Segments Traceable Fixed Costs Dollar break-even for a company is calculated as ______. (Traceable fixed expenses + Common fixed expenses) / Overall CM ratio Dollar sales for a segment to break even = Traceable Fxed expenses / Segment CM ratio

Calculating Total Manufacturing Costs

Total Manufacturing Costs = Direct Materials + Direct Labor + Applied Manufacturing Overhead

Operation Costing

Used in situations where products have some common characteristics and some individual characterisitics. - Example: Shoes have common characterisitcs in that all styles involve cutting and sewing that can be done on a repetitive basis, using the same equipment and following the same basic procedures. However, shoes also have unique characteristics that add operational costs.

Job-Order Costing

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

Allocation base

a measure such as direct labor hours or machine hours that is used to assign overhead costs to products and services

Product Costs

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.

FIFO Method

Bases costs solely on the costs and outputs from the current period. - Responsible for calculating unit costs based solely on the costs and outputs from the current period. - generally considered more accurate than the Weighted-Average Method, but much more complex. Calculating Equivalent Units of Production with FIFO Method: (a separate calculation is made for each cost category in each processing department) - shown in the figure Cost per equivalent unit = Cost added during the period / Equivalent units of production

Calculating Balance in Finished Goods

Beg. Balance = total cost to manufacture completed goods that year (Shift from WIP to Finished Goods) - Cost of Goods Sold = End. Balance

Weighted-Average Method (type of process costing)

Combines costs and outputs from the current and prior periods. - Responsible for calculating unit costs by combining costs and outputs from the current and prior periods. Calculating Equivalent Units of Production with Weighted-Average Method: - in the figure Cost per equivalent unit using the weighted-average method = (Cost of beginning work in process inventory + Cost added during the period) ÷ Equivalent units of production -> Costs added during the period does NOT include conversion costs Units Transferred to the Next Department = Units in Beg. Work in Process + Units started into production - Units in ending work in process

Raw materials inventory was $5,000 at the beginning of the year and $12,000 at the end of the year. During the year, a total of $27,000 in raw materials were purchased, including $4,000 of indirect materials that were put into manufacturing overhead during the period. Calculate the cost of direct materials used during the period.

Cost of direct materials = Beginning Inventory + Purchases - Indirect Materials - Ending Inventory ($5,000 + $27,000 - $12,000 - $4,000 = $16,000)

Cost of Goods Manufactured

Cost of goods manufactured are costs associated with goods finished during a period. Finished goods are all unsold goods.

Formula for determining the amount of overhead cost to apply to a particular job

Overhead applied to a particular job = Predetermined overhead rate X Amount of the allocation base incurred by the job (Direct Labor cost) To Calculate Total Cost: Total Cost = Direct Materials + Direct Labor + Total Overhead

Chapter 5 Questions

The contribution margin statement is primarily used for ______. internal decision making Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______. change in sales dollars × contribution margin ratio When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using Incremental Analysis The term "cost structure" refers to the relative proportion of fixed and variable costs in an organization. Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars. net operating income A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating leverage The relative proportions in which a company's products are sold is referred to a sales mix The degree of operating leverage ______. decreases as sales and profits rise is greatest at sales levels near the break-even point is not a constant

Prologue Questions

The three Vs that refine the definition of Big Data are Blank 1: variety Blank 2: volume Blank 3: velocity The economy would operate much less efficiently without ____________ behavior. Less would be available to consumers, and quality would be lower. Blank 1: ethical, moral, or honest When a company says "You should choose us because we understand and respond to your individual needs better than our competitors," it is following a(n) __________ strategy Blank 1: customer Blank 2: intimacy Premium brands such as Ritz-Carlton and Nordstrom tend to rely on a(n) ______ strategy. customer intimacy Preventive controls include ______. authorizations segregation of duties In terms of corporate social responsibility, companies provide environmental and human rights advocates with ______. full disclosure of suppliers located in developing countries A series of steps that are followed in order to carry out some task in an organization is a ______. business process The lean production management approach ______. organizes resources around the flow of business processes. tends to result in fewer defects. is often called just-in-time production.

Calculating Equivalent Units

To report ending inventory, partially completed units are translated into Equivalent Units. Formula: Equivalent Units = Number of partially completed units * Percentage Completion Equivalent Units is the product of the number of partially completed units and the percentage completion of thise units with respect to the processing in the department. Conversion Equivalent Units of Production = Completed and Transferred Units + % of Closing WIP Units Transferred to the Next Department = Units in Beg. Work in Process + Units started into production - Units in ending work in process

Calculating Cost of Goods Available for Sale

= Cost of Jobs to manufacture completed during the year + Beg. Finished Goods

Calculating if Overhead is underapplied or overapplied

= Overhead Applied - Total Actual Overhead Cost Overhead Applied = Cost Basis * Hours Actually Worked Total Actual Overhead Cost = Indirect Labor + Various Manufacturing Overhead Costs (e.g., depreciation, insurance, and utilities)

Chapter 2 Questions

Companies that make many different products each period use Job-Order Costing A bill of materials contains the ______. type of each direct material needed to complete a unit of product quantity of each direct material needed to complete a unit of product All manufacturing costs are assigned to units of product and all nonmanufacturing costs are treated as period cost under absorption costing Materials requisition forms are used for ______. controlling the flow of materials into production making journal entries in accounting records The type and quantity of each type of direct material needed to complete a unit of product is listed on the ______. bill of materials The type and quantity of materials to be drawn from the storeroom and the job that will be charged for the materials is specified on the ______. materials requisition form A job cost sheet contains ______. labor costs charged to the job manufacturing overhead costs charged to the job materials costs charged to the job An allocation base is a(n) ______. measure of activity used to assign overhead costs to products and services Widely used allocation bases in manufacturing include ______. units of product direct labor hours machine hours direct labor cost Manufacturing overhead ______. consists of many different types of costs contains fixed costs is an indirect cost The average manufacturing overhead cost per unit tends to ______. vary from one period to the next In the formula Y = a + bX, X represents the estimated ______. total amount of the allocation base The process used to assign overhead costs to products is called overhead Blank 1: allocation, application, allocating, allocated, assignment, or assigning The predetermined overhead rate is multiplied by the actual allocation base incurred by a job to find ______. overhead applied to the job A normal costing system applies overhead by job by multiplying a(n) ___________ ___________ rate by the ___________ amount of the allocation base incurred by the job. Blank 1: predetermined Blank 2: overhead or allocation Blank 3: actual, total, or exact Estimated manufacturing overhead $450,000 Estimated direct labor hours 150,000 Actual manufacturing overhead $405,000 Actual direct labor hours 180,000 Based on this information, the amount of overhead allocated to a job that used 300 direct labor hours is $ Predetermine overhead rate = Estimated overhead/estimated labor hour = 450000/150000 = $3 per labor hour Overhead allocated = Direct labor hour*Overhead rate = 300*3 Overhead allocated = $900 Overhead application is the process of ______. assigning manufacturing overhead cost to jobs The total cost of a job includes ______. direct labor cost applied manufacturing overhead direct materials cost The unit product cost is the same as the ______. average product cost per unit total job cost divided by number of units Cost-plus pricing occurs when ______. a markup percentage is added to the cost of a job To calculate the unit product cost using the job cost sheet ______ by the number of units produced. divide the total job cost An allocation base should be ______. a cost driver Typical cost drivers include ______. machine-hours computer time flight-hours A single predetermined overhead rate is called a(n) ____________ overhead rate Plantwide A factor that causes overhead costs is called a ______. cost driver When a predetermined markup is applied to a base to determine the target selling price, the company is using Cost-Plus pricing When all of a company's job cost sheets are viewed collectively, they form what is known as a(n) ______. subsidiary ledger True or false: When a company uses cost-plus pricing, they consider both the costs of production and the desired profit. False - Reason: Cost-plus pricing applies a predetermined markup to a cost base to determine selling price. Desired profit is not considered. Which of the following would be considered direct materials in a service firm that uses job-order costing? Paperwork at a law firm - This is;t an asset

Chapter 3 Questions

Which of the following costs are found on the balance sheet of a manufacturer? Manufacturing Overhead Raw Materials Direct Labor Work in Process consists of ______. actual direct materials cost applied manufacturing overhead actual direct labor cost The amount transferred from Work in Process to Finished Goods is ______. cost of goods manufactured Manufacturing overhead applied to production is always recorded on the ______________ side of the manufacturing overhead account and the ___________ side is always used to record the actual manufacturing costs incurred. Blank 1: credit Blank 2: debit A company incurred $10,000 in direct labor costs and $8,000 in indirect labor costs. The journal entry to record this transaction debits ______. Work in process $10,000 and Manufacturing overhead $8,000 and credits Salaries and wages payable $18,000 The Manufacturing Overhead account is debited when ______. actual overhead costs are incurred The journal entry that debits Work in Process and Manufacturing overhead and credits Salaries and Wages Payable is recording ______. direct and indirect labor costs If a company incurs $2,000 of factory rent, $1,000 of factory utilities, and $5,000 of miscellaneous factory costs, the journal entry to record these transactions would be to debit ______. Manufacturing overhead $8,000 and credit Accounts payable $8,000 When labor costs are incurred, _________ labor costs are added directly to the Work in Process account. only direct A journal entry that debits Manufacturing overhead and credits Accounts payable could be made to record ______. rent expense on factory equipment factory utilities expense The journal entry to record $20,000 in depreciation on factory equipment is debit ______. Manufacturing Overhead $20,000 and credit Accumulated Depreciation $20,000 Job cost sheets and the work in process account contain ______ manufacturing overhead. applied The cost of goods __________ is the sum of all amounts transferred from Work in process to Finished goods during a period. Blank 1: manufactured, completed, produced, or finished Unadjusted cost of goods sold is calculated by subtracting ______. ending finished goods inventory from goods available for sale Overapplied or underapplied overhead is the difference between ______. actual total overhead and total overhead applied Underapplied or overapplied manufacturing overhead can be disposed of by closing it to ______. Cost of goods sold or allocating it to Work in process, Finished goods, and Cost of goods sold Actual overhead costs may not be proportional to the actual amount of the allocation base used because ______. many actual overhead costs are fixed overhead spending may not be under control What side of the Manufacturing overhead account is actual manufacturing overhead entered on? Always the debit side The journal entry to record the more accurate allocation of overapplied or underapplied overhead includes entries to ______. Manufacturing overhead Cost of goods sold Work in process Finished goods The more accurate method of closing out the balance in Manufacturing overhead is ______. allocating it among Work in process, Finished goods, and Cost of goods sold Which of the statements regarding closing out over or underapplied overhead is correct? Closing to Cost of goods sold is simpler, and allocating is more accurate.

Chapter 4 Questions

Which of the following is a key difference between process and job-order costing? Under process costing, it makes no sense to try to identify materials, labor and overhead costs with a particular customer order. A processing department is an organization unit ______. where work is performed on a product, and materials, labor or overhead are added When using process costing, each processing department has a separate Work in Process Account Similarities between job-order costing and process costing include the ______. basic purpose to assign and compute product costs flow of costs through the manufacturing accounts manufacturing accounts used Differences between job-order and process costing include that process costing ______. accumulates costs by department is used for indistinguishable products Work is performed on products, and materials, labor, or overhead costs are added to products in a(n) Processing Department In process costing, manufacturing overhead costs are distributed to each department ______. according to the amount of the allocation base incurred in the department In process costing, manufacturing overhead costs are ______. generally applied using a predetermined overhead rate Conversion costs are ______. direct labor plus manufacturing overhead A processing department needs to calculate a separate unit cost for each type of cost incurred. True Which of the following equations is correct? Units in beginning WIP + units started or transferred in = Units in ending WIP + units completed and transferred out When computing the equivalent units of production under the weighted-average method, partially completed ______ inventory is ignored. beginning work in process When unit costs are transferred from Department A to Department B, Department B will treat the costs as ______. transferred in Characteristics of operation costing include ______. products are processed in batches costs are accumulated by the department Costs per equivalent unit are used to value ______. both units in ending inventory and units transferred to the next department Operations costing is similar to job-order costing because ______. each batch is charged for its own specific materials Costs transferred in from Department A to Department B ______. will always be 100% complete with respect to Department A Which of the following is not a characteristic of operation costing? Products are homogeneous. When computing the equivalent units of production under the weighted-average method, partially completed ______ inventory is ignored. beginning work in process

Absorption Costing

assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory