Managerial Accounting Exam #1

Job-order costing

Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as job-order costing. Job-order costing systems are used when: 1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Total manufacturing costs (TMC)

Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. These costs are incurred to make a product. TMC = DL + DM + MOH -- work on examples to get a good grasp.

Manufacturing overhead (MOH)

Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. These costs cannot be easily traced to specific units produced (also called indirect manufacturing cost, factory overhead, and factory burden). Manufacturing overhead includes indirect materials that are part of the finished product, but that cannot be easily traced to it. It includes indirect labor costs that cannot be conveniently traced to the creation of products. Other examples of manufacturing overhead include: maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on manufacturing facilities, etc.

Indirect materials (IM)

Materials used to support the production process.

Differences between Financial and Managerial Accounting

There are seven key differences between financial accounting and managerial accounting: Users: Financial accounting reports are prepared for external parties, whereas managerial accounting reports are prepared for internal users. Emphasis on the future: Financial accounting summarizes past transactions. Managerial accounting has a strong future orientation. Relevance of data: Financial accounting data should be objective and verifiable. Managerial accountants focus on providing relevant data even if these data are not completely objective and verifiable. Less emphasis on precision: Financial accounting focuses on precision when reporting to external parties. Managerial accounting aids decision makers by providing good estimates as soon as possible rather than waiting for precise data later. Segments of an organization: Financial accounting is concerned with companywide reports. Managerial accounting focuses on the segment reports. Examples of segments include: product lines, sales territories, divisions, departments, etc.. Managerial accounting-no externally imposed rules: Financial accounting conforms to GAAP and IFRS. Managerial accounting is not bound by GAAP and IFRS. Managerial accounting-not mandatory: Financial accounting is mandatory because various outside parties require periodic financial statements. Managerial accounting is not mandatory.

Work in Process Inventory

Work in process consists of units of production that are only partially complete and will require further work before they are ready for sale to customers.

Computing the cost of each unit in a finished job

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Computing under- or over-applied manufacturing overhead, and adjusting it to COGS

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Contribution margin

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Cost driver

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Contribution format income statement preparation

Contribution format: Sales $100,000 Variable Exp. 60,000 --------- Contribution Margin $40,000 Fixed Expenses 30,000 --------- Net operating income $10,000

Budget

A budget is a detailed plan for the future that is usually expressed in formal quantitative terms.

Business process

A business process is a series of steps that are followed in order to carry out some task in a business.

Constraint

A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want. The constraint in a system is determinedby the step that has the smallest capacity.

Fixed costs

A fixed cost is constant within the relevant range. In other words, fixed costs do not change for changes in activity that fall within the "relevant range." For example, your monthly contract fee for your cell phone is a fixed amount for a certain number of minutes. The monthly contract fee does not change based on the number of calls you make.

Selling & administrative costs

A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes, most of these other costs are typically classified as selling costs and administrative costs. These costs are also called selling, general and administrative costs, or SG&A. Selling and administrative costs are incurred in both manufacturing and merchandising firms.

Strategy

A strategy is a "game plan" that enables a company to attract customers by distinguishing itself from competitors.

Sunk cost

A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Since sunk costs cannot be changed and therefore cannot be differential costs, they should be ignored in decision making. While students usually accept the idea that sunk costs should be ignored on an abstract level, like most people, they often have difficulty putting this idea into practice.

Value chain

A value chain consists of the major business functions that add value to a company's products and services.

Variable costs

A variable cost varies, in total, in direct proportion to changes in the level of activity. For example, if you don't have a texting plan on your cell phone, text messaging costs 5 cents per text. Your total texting bill increases with the number of texts you send.

Schedule of Cost of Goods Sold preparation

COGS = Beg. FG + COG - End. FG -- do tests before the exam

Conversion cost

Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.

Corporate social responsibility

Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.

Cost of Goods Sold (COGS)

Cost of goods manufactured include the manufacturing costs associated with the goods that were finished

Differential (incremental) cost

Differential costs (or incremental costs) is a difference in cost between any two alternatives. Differential costs can be either fixed or variable. A difference in revenue between two alternatives is called differential revenue.

Direct labor (DL)

Direct labor consists of that portion of labor cost that can be easily traced to a product. Direct labor is sometimes referred to as "touch labor," since it consists of the costs of workers who "touch" the product as it is being made.

Direct materials (DM)

Direct materials are raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it. Examples include the aircraft engines on a Boeing 777, the Intel processing chip in a personal computer, the blank video cassette in a pre-recorded video, and a radio in an automobile.

Finished Goods Inventory

Finished goods consist of completed units of product that have not been sold to customers

Lean production (also known as JIT)

Lean production is a management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders. Lean production is often called just-in-time (JIT) production because products are only made in response to customer orders and they are completed just-in-time to be shipped to customers.

How costs flow through the various inventory accounts and eventually into COGS

Look in the Powerpoint presentation!!

Prime cost

Prime cost is the sum of direct materials cost and direct labor cost.

Mixed costs

Mixed costs (also called semi variable costs) contain both variable and fixed cost elements. The graph depicts the mixed costs of a normal utility bill. As illustrated in the graph, a utility bill contains a fixed and a variable cost component. The fixed portion of the utility bill is constant regardless of kilowatt hours consumed. This cost represents the minimum cost that is incurred to have the service ready and available for use. The variable portion of the utility bill varies in direct proportion to the consumption of kilowatt hours.

Tips from notebook

Non-manufacturing costs is not added to 'total manufacturing cost' - Operation. All manufacturers costs are product costs. When you see production, manufacturing, direct words, they mean product cost.

Relevant range

Nonetheless, within a narrow band of activity known as the relevant range, a curvilinear cost can be satisfactorily approximated by a straight line. The relevant range is that range of activity within which the assumptions made about cost behavior are valid.

Opportunity cost

Opportunity cost is the potential benefit that is given up when one alternative is selected over another. These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions.

Computing total job cost

Our predetermined overhead rate is $4 per direct labor-hour, so we will apply $32 (8 hours times $4 per direct labor-hour) of overhead to this job. The computation is shown in the manufacturing overhead section of the job cost sheet and in the summary section.

Period costs

Period costs include all selling costs and administrative costs.

Three main functions of management: Planning, Controlling, and Decision Making

Planning involves establishing goals and specifying how to achieve them. Plans are often accompanied by a budget. Controlling involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change. Part of the control process includes preparing performance reports. A performance report compares budgeted to actual results to improve future performance. Decision making involves selecting a course of action from competing alternatives. Many managerial decisions revolve around answering three questions: a. What should we be selling? b. Who should we be serving? c. How should we execute?

Product costs

Product costs include all the costs that are involved in acquiring or making a product. More specifically, it includes direct materials, direct labor, and manufacturing overhead. Consistent with the matching principle, product costs are recognized as expenses when the products are sold. This can result in a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement. Product costs are also known as inventoriable costs. The discussion in the chapter follows the usual interpretation of GAAP in which all manufacturing costs are treated as product costs.

Raw Materials Inventory

Raw materials include any materials that go into the final product.

Segment

Segments of an organization: Financial accounting is concerned with companywide reports. Managerial accounting focuses on the segment reports. Examples of segments include: product lines, sales territories, divisions, departments, etc..

Theory of constraints

The Theory of Constraints (TOC) is based on the observation that effectively managing the constraint is the key to success.

High-Low Method of estimating total mixed costs Formula: Y = a +bX

The first step is to choose the data points pertaining to the highest and lowest activity levels. In this case, the high level of activity was in June at 850 hours of maintenance and the low level of activity is in February with 450 hours of maintenance. Notice that this method relies upon two data points to estimate the fixed and variable portions of a mixed cost, as opposed to one data point with the scattergraph method. The second step is to determine the total costs associated with the two chosen points. We incurred costs of $9,800 at the high level of activity and $7,400 at the low level of activity. The third step is to calculate the change in cost between the two data points. The change in maintenance hours was 400 hours and the change in maintenance dollars was $2,400. Notice, this method relies upon two data points to estimate the fixed and variable portions of a mixed costs, as opposed to one data point with the scattergraph method. For this example, we divide $2,400 by 400 and determine that the variable cost per hour of maintenance is $6.00. -- Work on examples to get a good grasp of the formula.

Job cost sheet

The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. A job number uniquely identifies each job. Direct material, direct labor, and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account.

Computing a predetermined overhead rate (POHR)

The predetermined overhead rate is calculated by dividing the estimated amount of manufacturing overhead for the coming period by the estimated quantity of the allocation base for the coming period. Ideally, the allocation base chosen should be the cost driver of overhead cost. -- do exercises to get a grasp

Applying manufacturing overhead using a predetermined overhead rate

The predetermined overhead rate is computed before the period begins using a four-step process. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Where, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base.

Schedule of Cost of Goods Manufactured preparation

The schedule of cost of goods manufactured contains the three elements of costs mentioned previously, namely direct materials, direct labor, and manufacturing overhead. It calculates the cost of raw material, direct labor, and manufacturing overhead applied to production. It also calculates the manufacturing costs associated with goods that were finished during the period. COGM = Beg. WIP + TMC - End. WIP

Traditional income statement preparation

Traditional format: Sales $100,000 COGS 70,000 --------- Gross Margin $30,000 Selling & Admin. Exp. 20,000 --------- Net operating income $10,000

Indirect labor (IL)

Wages paid to employees who are not directly involved in production work.

Journal entries to record costs & cost transfers - materials, labor, manufacturing overhead, WIP Inventory, Finished Goods Inventory, Cost of Goods Sold

When raw materials are purchased they are debited to the raw materials inventory account and credited to accounts payable. The cost of direct material requisitions is debited to Work in Process and added to the job cost sheet which serve as a subsidiary ledger. To account for the indirect materials requisition, the manufacturing overhead account is debited and the raw materials inventory account is credited. -- Look notes and powerpoint slides