Accounting #3
Allocate manufacturing overhead costs to one product:
1) Determine the manufacturing activity that causes the company to incur the majority of the overhead dollars. 2) Determine how much of this activity it takes to make one product and the total quantity of the activity required for the year to manufacture all products. Quantity of the overhead activity required to make 1 x Estimated total units to manufacture during the year = Total estimated annual activity 3) Compute the pre-determined manufacturing overhead rate: Rate = Total Estimated Annual Manufacturing Overhead Dollars / Total Estimated Annual Activity (from step 2) 4) Determine the cost of manufacturing overhead incurred to make one product: Pre-determined manufacturing overhead rate (from step 3) x Quantity of activity required to manufacture one product (from step 2) = The manufacturing overhead cost to make one product.
Cost Sheet: Direct Labor
1) Each different type of direct labor required 2) Hours required for each labor type to make one 3) The cost per hour that is paid for each type of labor
Cost Sheet: Manuf. Overhead
1) The activity the company does that causes the company to incur the majority of manufacturing overhead costs 2) The quantity of the activity required to make one product 3) The average cost of doing the activity each time it is done(the pre-determined manufacturing overhead rate)
Cost sheet: direct materials
1) The different types of direct material required 2) The quantity of each type of direct material required 3) The cost for one quantity of each material required
Using the Cost Sheet
1) price the product or service 2) determine the quantity of material purchased 3) monitor the cost of materials purchased and the quantity used 4) determine how many employees with different skill levels are needed 5) monitor the efficiency of direct labor 6) compare actual product costs to budget and take corrective action
When does management use a flexible budget?
BEFORE the period begins for planning purposes AT END of period to determine if costs were successfully controlled and to determine what factors contributed to income being different than expected
Ideal standards
Can only be obtained under idea/perfect circumstances
Sunk Cost
Cost that is already paid for and can not be changed by a decision made now or in the future.
Service companies
Determine cost to provide each service to effectively price the service to the customer
Managerial Accounting
Does not follow GAAP and there are no reporting regulations Prepares reports only for management's internal use Provides information to make decisions regarding the future Relevance of data is emphasized over reliability Focuses on timeliness of information Nothing is required to be reported, reports what management needs to see Reporting is focused on parts of the organization such as departments or divisions and not on the organization as a whole.
To get a certain profit - Sell Units of ? (required sales quantity in units for a before-tax target profit)
Fixed Costs + Profit/ Contribution Margin Per Unit
To Get Break Even in Sales
Fixed Costs / Contribution Margin Ratio (%)
To Get Break Even Quantity in Units
Fixed Costs/ Contribution Margin Per Unit
The Institute of Management Accountants
Goal is to assist those working in managerial accounting positions to develop professionally. Provide general guidelines and assistance for managerial accountants Sponsors the Certified Managerial Accountant certification
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another alternative. Opportunity costs are not recorded/reported because they do not occur. The cost is the benefit that you gave up.
Relevant Range
The range of activity where the assumption about cost behavior is valid.
Cost volume profit analysis
Uses characteristics of variable and fixed costs that do not change to project profit as volume changes
Selling Costs
all cost associated with marketing the finished products and getting the product to the customer
Direct labor hours
allocate MOH because more space, supervision, benefits required to support additional employees working more hours
Machine hours
allocate MOH costs when many large machines are used and machine costs such as depreciation or maintenance are a large part of total MOH
The profit should always be stated in
before tax dollars
Standard
estimate of what is required to make the product -budget, estimated, expected
Indirect material
low cost materials that end up in the product or are used to make the product. Examples are glue, tape, screw, marking pens, etc. It is not easy to track exactly how much is used to make one product.
Practical standards
"tight" but attainable and allow for normal downtime and waste
Indirect labor
Involved in making the product at the plant but do not touch the product to make it. example: salaries of the plant managers, supervisors, and quality inspectors
Manuf. Overhead
The amount of manufacturing overhead required to make one product is not something that can be seen going directly into or touching the product as it is manufactured. The actual amount of manufacturing overhead cost incurred to make each product can not be determined by watching the product being made. A "pre-determined overhead rate" is used to determine the amount of manufacturing overhead cost to allocate to each (one) product. The managerial accountant determines the production activity that causes the company to incur the majority of manufacturing overhead costs. This activity is used to allocate manufacturing overhead costs to individual products.
Cost standard
how much is expected to be paid for one quantity
Contribution Margin Ratio
-Gives amount as percent of every sales dollar that is added to operating income when sales dollars increase (The percent of every sales dollar that is available for profit once fixed costs are covered) Contribution Margin/sales in total or per unit Change in Sales $ x Contribution Margin Ratio = Change in Contribution Margin $
Roles
-production manager -HR manager -Managerial accountant
What changes when volume changes?
-total sales -total variable costs -total contribution margin
The cost sheet is the budget/estimate/expected
1) quantity required to make one unit 2) cost of one quantity 3) total cost for each type of cost to make one unit of product (direct material, direct labor, manufacturing overhead)
Examples of activities performed by managerial accountants are:
1. Determining the cost of providing a service or making a product 2. Assist management in profit planning and formalizing the plans into budgets 3. Determine the behavior of costs and how profit will change as sales and production volumes change 4. Compare actual costs and financial results with budgeted costs and results 5. Providing cost and sales information necessary for management to use to make a decision.
"Units made" NOT used:
1. Products are made using different steps of production 2. all products are not the same size 3. all products do not require same amount of time to manuf. 4. differing amounts of space and supervision are required for different products
Resolving an ethical delimna
1st - follow the established procedures within your organization 2nd - if the issue is not resolved to your satisfaction, - present problems to the next higher management level -- if you are not clear on the issues, discuss with an objective advisor to clarify your alternatives and solutions 3rd - if the issue can not be resolved, resign from your position
Budgeted sales and variable cost per unit (which should not change bc volume changes) are multiplied by:
ACTUAL sales volume to get BUDGET total variable costs
Discretionary Costs
Annual decisions made by management to spend in certain areas for certain things. Can be cut for short periods of time with minimal damage to long term goals.
Standards for Ethical Conduct for Practitioners of Management Accounting and Financial Management:
Competence - maintain competence by ongoing development of knowledge and skills, perform duties in accordance with relevant laws, regulations and technical standards, prepare complete and clear reports and recommendations, after appropriate analysis of relevant and reliable information Confidentiality - refrain from disclosing confidential information except where authorized to do so Integrity - avoid actual or apparent conflicts of interest and always advise of any conflicts of interest that arise, refuse any gift or favor that would appear to influence your actions, recognize and communicate any professional limitations that would preclude you from doing an adequate job Objectivity - communicate information fairly and objectively, disclose all relevant information that could influence the decision maker,communicate unfavorable as well as favorable information and do not be biased towards one outcome or another
Variance
Difference in the actual amount and the budget amount at the same volume Favorable: Actual costs are less than budgeted cost at that level of activity Unfavorable: Actual costs are more than budgeted cost at that level of activity
The cost sheet lists only product costs:
Direct Materials, Direct Labor, Variable Manufacturing Overhead, Fixed Manufacturing Overhead
General Ledger
Financial summary of all transactions of the company
To get a certain profit, need Sales $ of ? (required sales dollars (revenues) for a before-tax target profit)
Fixed Costs + Profit / Contribution Margin Ratio (%)
Product Costs
Include all costs that are required to make a product I.e Direct Material, Direct Labor, Manufacturing Overhead Are included as part of inventory and shown on the balance sheet until the product is sold. Product costs are often called "inventoriable costs" or "manufacturing costs". When the product is sold, the costs are "matched" to the sales revenue and reported on the income statement as cost of goods sold
Determine if the company should increase fixed costs
Incremental Contribution Margin- less Increase in Fixed Expenses = Change in Income from the Decision
Committed
Investment in facilities, equipment, and the basic operations of the company 1) long term in nature 2) can't be significantly reduced, even over short periods of time without changing the long term goals of the company Difficult to change the cost once the commitment has been made.
Management application of the terms
Management will put together a flexible budget to determine what sales, costs, and profits are expected to be at various levels of sales or production. Management can also use the format to focus on costs only by leaving out the sales and profits line items.
Margin of Safety %
Margin of Safety / Total Budgeted or Current
Break Even
Occurs when profit = 0 which occurs when contribution margin is equal to fixed costs When profit = 0 Sales = Variable Costs + Fixed Costs + 0 Profit
Mixed Costs (sometimes called semi-variable)
One that contains both variable and fixed costs elements: Fixed - minimum cost of having a service ready and available for use Variable - cost incurred for actual consumption of the service Total Mixed Costs = Total Fixed Cost $ + (Variable Cost $ per activity x # of the activity)
Management functions
Planning: Identify objectives the company wants to accomplish which will add value to the company and increase profits. Discuss ways to accomplish the objectives Prepare budgets to accomplish the profit objective Directing/Motivating: Coordinating the activities to produce a smooth running operation. Oversee day to day activities and keep the organization functioning smoothly Assign jobs/tasks - answer questions - solve problems Controlling: Make sure the plans are being followed and objectives are accomplished Performance reporting - compare actual results to the budget Implement changes when objectives and goals are not being accomplished Decision Making: Use all information provided to make good business decisions.
Flexible Budget
Provides estimates for what costs should be for different levels of sales volume or units produced. Management can then compare the actual results to the budget for a whatever level of sales volume or units produced actually happened. Note: -PER UNIT sale prices and var. costs don't change with volume -Cont Margin per unit doesn't change -TOTAL fixed costs don't change with volume
Cost Volume Profit Graph
Put sales $ on the vertical axis and units on the horizontal axis 1) Draw a horizontal line for fixed expenses 2) Chose a volume of sales and put a dot for sales and total expenses 3) Draw a line from the sales dollar plot to the corner (0,0) 4) Draw a line from the total expense plot from the fixed expense line on the verticle axis Where the two lines cross is the break - even point
Financial Accounting
Reports are provided outside the organization - external reports Reports past activities - based on a historical perspective Reliability of data is emphasized - reports take more time to provide Focus on precise information since they are used outside the company Summarized data for entire company as a whole Must follow GAAP which has specific required external reports
Contribution margin per unit
Sales price per unit - ALL variable costs per unit -Amount operating income increases when one more unit is sold and decreases when one less unit is sold
Period Costs
Selling and Administrative costs. These costs are reported on the income statement as they are incurred. Not part of manufacturing overhead, not related to making the product. Examples: Anything at corporate headquaters, anything related to selling the product, shipping costs, administrative salaries, executive salaries, administrative office expenses, sales commissions, advertising, research and development, etc. Warehouse costs and people who move inventory are period costs
Direct Materials
The estimated quantity of direct materials required to make the product is determined by looking at the product or reviewing the design specifications. The estimated cost for one quantity is determined by what is currently paid and the direction the cost is trending. The purchasing department is responsible for maintaining adequate supply of direct materials and purchasing the highest quality materials at the lowest cost. The production manager and supervisors are responsible for the quantity used and minimizing waste.
Sales Mix
The percentage of total sales for each product. This is important when a company has more than one product. A change in sales mix can change the total profit. Different products have a different contribution margin. Lower sales in products with high contribution margins can reduce total company profits. Higher sales in products with lower contribution margins can reduce total company profits. When a company has more than one product CVP analysis is done in the following ways: 1. Using a total company average for the CM ratio: Total Contribution Margin for the Company/ Total Sales for the Company = Total CM % 2. Use the weighted average (W.A.) method: Compute a weighted average sales price per unit Compute a weighted average contribution margin per unit Then W. A. CM per unit / W.A. Sales per unit = W. A. CM %
Direct Labor
The production manager determines the steps required to produce one unit of product. The amount of time it is expected to take is determined by monitoring the average time required to complete production of one unit. The production manager and supervisors are responsible for labor efficiency. Employees with different skill levels are paid different amounts per hour. The human resource manager works with the production manager to hire qualified labor at the lowest cost per hour.
What is the managerial format?
There are no required specific formats for reporting - the management accountant provides the report that gives the most useful information.
Margin of Safety
Total Budgeted or Current Sales - Break Even Sales -estimates the amount sales can decrease for a profitable company before the company is no longer profitable
Fixed Cost
Total cost does not change with changes in the volume of activity (within a relevant range) The cost per unit will change as the number of units change Rent, insurance, administrative salaries are examples of fixed costs. These costs do not change just because you make or sell one more unit as long as you stay within the relevant range
Easiest way to allocate on a per unit basis:
Total manuf. overhead $/ # total units made = Total MOH cost per unit Note: "Units made" will result in the same manuf. overhead cost for each product made
Format of flexible budget
Units sold: 100 200 300 400 500 sales Units sold x sale price -variable costs Variable product costs Units sold x cost for 1 Variable period costs Units sold x cost for 1 = Contribution margin Changes in prop. to units -all fixed costs Total doesn't change =operating income
Contribution margin income statement (variable cost I/S)
Used to determine expected change in operating income as sales change -the constant per unit amount is multiplied by any given sales volume (in units) to project total dollar amounts
Operating Leverage
Used to estimate how much profits will change when sales dollars change Contribution Margin/ = A factor Net Operating Income ( the higher the better) Take the factor times the % increase in sales to determine the % increase in profits that should occur To get the expected income in dollars use this formula: Operating Leverage Factor x % increase in sales = % increase in profits x current profits = added profits + current profits = expected profits if sales increase by that %
Variable Cost
Varies in total, in direct proportion to changes in the level of activity. The total cost increases/decreases as units made increases/decreases. Variable cost is constant if expressed on a per unit basis. Direct material, direct labor and variable overhead are all variable costs. Costs that vary with sales, such as sales commission are variable costs. It is a variable cost if it costs you more if you make or sell one more.
Direct Costs
a cost that can be easily and conveniently traced to one product. Direct costs are direct materials and direct labor
Indirect Costs
a cost that cannot be easily and conveniently traced to one product. Manufacturing overhead and period costs are indirect costs.
Manufacturing Overhead
all costs of manufacturing the product except direct materials and direct labor Costs associated with operating the factory that makes the product. If the cost has the word "factory", "plant", "manufacturing", as a descriptive word, the cost will be part of manufacturing overhead. Manufacturing overhead includes things at the manufacturing plant that have to be incurred in order to get the product made, but is not part of the actual product or touches to make the product. It is indirect. You can not easily determine how much of these costs it takes to make one product. The total dollars spent support the manufacturing of many products. Examples: utilities at the plant such as electricity, water, phone. Support personnel at the plant such as an accountant, human resources or computer support. Training, maintenance and repairs, rent, insurance, taxes, etc. KEY - it has to happen at the manufacturing facility. Indirect labor and indirect material are part of manufacturing overhead.
Administrative Costs
costs incurred for the general administration of the organization
Cost Sheet
detail listing of what is estimated to be required and what it is estimated to cost to make ONE product or provide one service.
Conversion Costs
direct labor plus manufacturing overhead. What it costs to take the materials and convert them to a finished product
Prime Costs
direct materials plus direct labor
Quantity standard
how much is expected to be used to make one product
Sales, variable costs, and contribution margin are expressed
on a per unit basis because as volume changes the total $ changes.
Static Budget
prepared at the beginning of the period, valid only for one planned level of activity. The activity would be either sales volume or units produced.
Unit
product that is sold to customer
What is managerial directed toward?
providing information to managers inside the organization
Direct Materials
raw materials that become a part of the finished product The cost is high enough that you want to keep track of what is used in each product. It is easy to track how much material is required for one product to be made. If the cost of a particular material can not be easily traced to one product, it is an indirect material and is part of manufacturing overhead.
Contribution Margin
sales revenue - all variable costs It is the amount available to cover (contribute) fixed costs and give profit Sales Less ALL Variable Costs Contribution Margin Less ALL Fixed Costs Net Operating Income/Loss -Profitability achieved when margin is greater than fixed costs To calculate change: change in total sales x cont. margin ratio
What does using "units made" as the activity allocate?
the SAME AVG COST for MOH for each product -doesn't consider that products made differently require diff. amounts of resources to make
Pre-determined manufacturing overhead rate
used to estimate the amount of manuf. overhead cost incurred for EACH product made -estimate of cost to manuf. overhead overtime the activity occurs -two rates: fixed and variable
Direct Labor
workers that touch the product to make the product - also includes workers who operate the machine if the product is made by machine