Test I Managerial Accounting

Three Activities

1) Planning, 2) Controlling, 3) Decision Making

Under applied on net income

Net operating income will decrease

Least Squares Regression Method

A statistical method used to determine a line of best fit by minimizing the sum of squares created by a mathematical function. A "square" is determined by squaring the distance between a data point and the regression line. The least squares approach limits the distance between a function and the data points that a function is trying to explain. It is used in regression analysis, often in nonlinear regression modeling in which a curve is fit into a set of data.

Cost of job calculation

Add all the costs of materials needed to complete the project. For example, a company manufactures widgets. To produce 100 widgets, the business requires $20 of metal, $4 in screws and $8 in wood. The total cost of direct materials is $32. Calculate the amount of labor costs. In our example, the company pays $15 an hour to the two employees who create the widgets. The two employees work a total of 10 hours to produce 100 widgets. Therefore, the company's total direct labor costs are $150. Calculate the amount of manufacturing overhead. Manufacturing overhead is normally determined as a percentage of hours worked. For example, the company estimates that overhead is 125 percent of labor costs. Therefore, there is $187.50 in manufacturing overhead costs from the equation $150 x 1.25. Add the costs calculated in Steps 1 through 3. In our example, $32 + $150 + $187.50 = $369.50. This is the total cost of the project. Divide the total cost of the project by the number of units produced to determine cost per unit. In our example, $369.50 / 100 units = $3.695 per unit.

Account for Total Cost in each processing department

Beginning "Work in Progress" + costs added during period

Variable Cost

Changes 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.

Managerial Accounting

Concerned with providing information to managers for use within the organization.

Financial Accounting

Concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.

Cost per equivalent unit

Cost of beginning Work in Process Inventory + Cost added during the period / Equivalent units of production

When overhead is under-applied:

Cost of goods sold xxxx Manufacturing overhead xxxx

Differential Cost and Revenue

Differential cost is the difference between the cost of two alternative decisions, or of a change in output levels. The concept is used when there are multiple possible options to pursue, and a choice must be made to select one option and drop the others. -Example of alternative decisions. If you have a decision to run a fully automated operation that produces 100,000 widgets per year at a cost of $1,200,000, or of using direct labor to manually produce the same number of widgets for $1,400,000, then the differential cost between the two alternatives is $200,000. -Example of change in output. A work center can produce 10,000 widgets for $29,000 or 15,000 widgets for $18,000. The differential cost of the additional 5,000 widgets is $11,000.

Direct Costs

Direct costs are costs that can be easily traced to a particular object (also called a cost object), such as a product, the raw materials used to manufacture a product, or the labor associated with the work to produce the product. If your company produces a widget and a production manager is hired to oversee production of that widget, then the production manager's salary is a direct cost. If you own a carpet cleaning business, which is a service organization, and you hire workers just to clean carpets, their wages are direct costs. Direct costs are often, but not always, variable costs. Variable costs increase as more units of the product are manufactured. As a result, raw materials are variable and direct costs. But, if there is a supervisor overseeing the manufacturing of this particular product, their salary is probably the same regardless of how much of the product is manufactured, so it is a fixed cost.

Variable expenses (cost)

Examples -The cost of goods sold expense, which is the cost of products sold to customers -Commissions paid to salespeople based on their sales -Franchise fees based on total sales for the period, which are paid to the franchisor -Transportation costs of delivering products to customers via FedEx, UPS, and freight haulers (railroads and trucking companies) -Fees that a retailer pays when a customer uses a credit or debit card -Cost of goods sold is usually the largest variable expense of a business that sells products, as you would suspect. Other variable expenses are referred to as operating expenses, which are the costs of making sales and running the business. -The sizes of variable operating expenses, relative to sales revenue, vary from industry to industry. Delivery costs of Wal-Mart and Costco, for instance, are minimal because their customers take the products they buy with them. Other businesses deliver products to their customers' doorsteps, so that expense is obviously much higher (and dependent on which delivery service the company uses — FedEx or UPS versus the U.S. Postal Service, for example).

Fixed expenses (costs)

Examples: -rent on the land, depreciation of the structure and the equipment, and the annual insurance premium -Fixed expenses are the costs of doing business that, for all practical purposes, are stuck at a certain amount over the short term. Fixed expenses do not react to changes in the sales level. Here are some more examples of fixed operating expenses: -Gas and electricity costs to heat, cool, and light the premises -Employees' salaries and benefits -Real estate property taxes -Annual audit fee (if the business has its financial statements audited) -General liability and officers' and directors' insurance premiums -If you want to decrease fixed expenses significantly, you need to downsize the business (lay off workers, sell off property, and so on). When looking at the various ways for improving profit, significantly cutting down on fixed expenses is generally the last-resort option. A business should be careful not to overreact to a temporary downturn in sales by making drastic reductions in its fixed costs, which it may regret later if sales pick up again.

Committed fixed cost

Has a long future planning horizon— more than on year. These types of costs relate to a company's investment in assets such as facilities and equipment. Once such costs have been incurred, the company is required to make future payments

Mixed Costs

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? Y = a + bX Y = $40 + ($0.03 × 2,000) Y = $100

Product Costs (Manufacturing Cost)

Include all costs that are required to make a product, Product costs are: Direct Material, Direct Labor, Manufacturing Overhead, Indirect Material and Indirect Labor. Are included as part of inventory and shown on the balance sheet until the product is sold

Indirect Costs

Indirect costs are those which affect the entire company, not just one product. They are costs like advertising, depreciation, general supplies for your firm, accounting services, etc. They are services, and costs, for your entire firm, not just one product. Indirect costs are usually called overhead. Overhead is the ongoing cost of operating a business that can't be associated with just one product or service. Indirect costs can be fixed or variable costs. Often, they are fixed costs with an example being the rent you pay on your building. Sometimes, they are variable. An example would be your electricity or water bill which can change monthly.

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

Process costing

Is used when a single product is produced on a continuing basis or for a long period of time, systems accumulate costs by department, systems compute unit costs by department

Management Approches

Lean production-JIT = A production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand. Theory of Constraints (TOC) = A management approach that emphasizes the importance of managing constraints.

When overhead is over-applied:

Manufacturing overhead xxxx Cost of goods sold xxxx

Indirect Materials and Indirect Labor

Materials such as tools, cleaning supplies, and office supplies make production of a company's products possible but can't be assigned to just one product. These are classified as indirect materials or the overhead portion of the material your company uses. Indirect materials costs are usually variable because materials are based on the level of production. Labor costs that make production of a product or products possible but can't be assigned to one particular product are classified as indirect costs. An example of an indirect labor cost would be the salary of a manager as that manager would manage the entire operation and not just one product line. The next issue is whether indirect labor costs are fixed or variable costs. In this case, if the salary is a monthly or annual salary and does not change based on production, it is a fixed cost. If it is based on production, it is a variable cost. It is important for a business owner to correctly classify direct and indirect costs. One reason is because overhead, your indirect costs, are tax-deductible items. Some of the overhead expenses will be in be included in cost of goods sold, business deductions, inventory, and other categories.

Over applied on net income

Net operating income will increase

Mixed Costs

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) An example of a mixed cost is charges for a cell phone. The cost is $39.99 plus $0.40 for each minute used over 400 minutes An example of a mixed cost is charges for water and sanitation. The cost is $55 per month, plus $1.25 per gallon for gallons used over 250 gallons used.

PRODUCT COSTS

Product costs are costs that are incurred to manufacture products. They include anything that becomes part of the product, anyone who touches the product to make it, and all the costs of the facilities and management incurred to make the product. The three major categories of product costs are:

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.

Contribution Format income Statement

Sales - Variable Costs = Contribution Margin; Contribution Margin - Fixed Costs = Net Income. Sales less: Variable Expense Manufacturing Selling Administration Contribution Margin less: Fixed costs Manufacturing Selling Administration Net Income

Period Costs (Non-Manufacturing Cost)

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 Selling Costs - all cost associated with marketing the finished products and getting the product to the customer Administrative Costs - costs incurred for the general administration of the organization

Professional Ethics

Standards of Code of Conduct for Managerial Accountants = Competence, Confidentiality, Credibility, and Integrity

Predetermined overhead rate

The formula of predetermined overhead rate is written as follows: predetermined-overhead-rate-formula: Estimated Manufacturing Overhead Cost / Estimates total units in the allocation base Example: Suppose GX company uses direct labor hours to assign manufacturing overhead cost to job orders. The budget of the GX company shows an estimated manufacturing overhead cost of $8,000 for the forthcoming year. The company estimates that 1,000 direct labors hours will be worked in the forthcoming year. Using the above information, we can compute the predetermined overhead rate as follows: predetermined-overhead-rate-formula: Estimated Manufacturing Overhead Cost / Estimates total units in the allocation base = $8,000 / 1,000 hours = $8.00 per direct labor hour Notice that the formula of predetermined overhead rate is entirely based on estimates. The overhead applied to products or job orders would, therefore, be different from the actual overhead incurred by jobs or products. This difference is eliminated at the end of the period. The elimination of difference between applied overhead and actual overhead is known as disposition of over or under applied overhead.

Direct Materials and Direct Labor

The most common direct costs are direct materials and direct labor. Direct materials are the materials that can be specifically identified with the product. If you are a furniture maker, your direct materials would be the wood that goes into making your furniture along with the nails, varnish, and other products that you apply specifically to making the furniture. But, you wouldn't count the gasoline that the loggers use to drive the trucks to get to the forest to cut down the trees as direct materials. Direct materials are all the materials required to produce a product such as raw materials. Direct materials costs are assignable to that particular product, such as the cost of each raw material.

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

Direct Cost

a cost that can be easily and conveniently traced to one product. Direct costs are direct materials and direct labor

Indirect Cost

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 of manufacturing overhead costs are: - 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.

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

Discretionary fixed cost

has a short future planning horizon—under a year. These types of costs arise from annual decisions of management to spend in specific fixed cost areas, such as marketing and research.

Job-order costing

is used when many different jobs having different production requirements are worked on each period, accumulated costs by individual jobs, compute unit costs by job on the job cost sheet.

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.

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