ACT 4B FINAL Flashcards
Managerial Accounting
A profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.
Planning(Functions of Management)
Setting goals and objectives for the company and deciding how to achieve them
Directing
Overseeing the company’s day-to-day operations
Controlling(Functions of Management)
Evaluating the results of business operations against the plan and making adjustments to keep the company pressing toward its goals
Financial Accounting
External users, such as creditors, stockholders, and government regulators.
Cost Objective
Anything for which managers want to know the cost
Direct Cost
A cost that can be traced to the cost object; meaning the company can readily identify or associate the cost with the cost object.
Indirect Cost
A cost that relates to the cost object but cannot be trace specifically to it.
Product cost
Incurred by manufacturers to produce their products or incurred by merchandisers to purchase their products.
Period Costs
Cost incurred by the company that do not get treated as inventory but, rather, are expensed immediately in the period in which they are incurred
Cost of leasing the retail location
Period Cost
Cost of manager’ and sales associates’ salaries
Period cost
Cost of merchandise purchased for resale
Product Cost
Cost of designing the operating the company’s website
Period Cost
Cost of shipping merchandise to the store
Product cost
Cost of providing free shipping to customers who buy product online
Period cost
Cost of utilities used in running the retail locations
Period Cost
Cost of import duties paid on merchandise purchased from overseas suppliers
Product Cost
Depreciation on store shelving and shopping carts
Period Cost
Prime Cost
Refer to the combination of DM and DL
Conversion Costs
Combination of DL and Manufacturing overhead
Controllable cost
In the long run, meaning management is able to influence or change them
Uncontrollable costs
Cost that cannot be changed or short run by management
Fixed
Stays constant in total over a wide range of activity levels
Variable Cost
Change in direct proportion to change in volume
Indirect materials, machine lubricants
Variable cost
Cost of property tax, insurance, straight-line depreciation
Fixed
Manufacturing Costs
DL+DM+ Manufacturing overhead= Product cost
Process costing: Pace spends $500,000 on purchasing, cleaning, and chopping the vegetables to make 1 million jars of Picante sauce during the month. The average cost per jar of the cleaning and chopping process is as follows:
The average cost to mix and bottle each jar of sauce is $0.25
$500,000/1000000 jars= $.50 per jar
$.50 + $.25= $0.75 per jar
Job Costing
fitness equipment, cross-trainers, bikes, Boeing(airplanes), custom-home builders (unique houses) high-end jewelers, sofas and chairs
Touch Gear had an estimated $1,000,000 of MOH for the year and 62,500 DL hours, resulting in a predetermined MOH rate of $16/DL hour. By the end of the year, the company had actually incurred $975,000 of MOH cost and used a total of 60,000 Dl hours on jobs. By how much had Touch Gear overallocated or under-allocated MOH for the year?
$1000,000/62,500 DL =$16/DL
Actual MOH 975,000
Allocated MOH- $16 X 60,000= 960,000
975,000-960,000= 15,000 Under allocated
Touch Gear had an estimated $1,085,000 of MOH for the year and 60,500 DL hours, resulting in a predetermined MOH rate of $18/DL hour. By the end of the year, the company had actually incurred $825,000 of MOH cost and used a total of 63,000 Dl hours on jobs. By how much had Touch Gear overallocated or under-allocated MOH for the year?
825,000-1134,000= ($309,000)
Assume Life Fitness’s managers had chosen direct labor cost as the MOH allocation base, rather than direct labor hours. Furthermore, assume management estimates $1,200,000 of the direct labor cost of the year
PMOH rate= $100,000/ $1,200,000 of DL cost= .8333 or 83.33% direct labor cost
MOH allocated to Job 603= 83.33% X $10,000 direct labor cost= $8,333
Unit level
activities and cost incurred for every unit.
Batch-level
activities and cost incurred for every batch, regardless of the number of units in the batch.
Product-level activities
activities and cost incurred for a particular product, regardless of the number of units or batches of the product produce
Activity Cost Driver
Number of Parts moved, Weight of parts moved, cubic volume of parts moved, time spent moving the parts
Dairymaid makes organic yogurt. The only ingredients, milk and bacteria cultures, are added at the very beginning of the fermentation process. At month end, Dairymaid has 100,000 cups of yogurt that are only 25% of the way through the fermentation process. Use the equivalent unit formula to answer the following:
a. How many equivalent units of direct materials are in ending work in process?
b. How many equivalent units of conversion cost are in ending work in process?
physical units % of completion = EQ
100,000 X 100%= 100,000 EU of DM
100,000 x 25%= 25,000 EQ of COC
At the end of October, Cranston Bottling’s mixing department had “Total costs to account for” of $739,731. Of this amount, $271,596 related to direct materials costs, while the remainder related to conversion costs. The department had 52,230 total equivalent units of direct materials and 45,450 total equivalent units of conversion costs for the month. Compute the cost per equivalent unit for direct materials and the cost per equivalent unit for conversion costs.
- Direct Materials Conversion Costs
Total cost (a) $271596 $468135
Equivalent units (b) 52230 45450
Cost per equivalent unit (a/b) $5.2 $10.3
*Total cost of conversion costs
= $739731 - $271596 = $468135
The Bruce Company is considering investing in a wind turbine to generate its own power. Any unused power wind turbine to generate its own power. Any uused power will be slod back to the local utility company. Between Cost savings and new revenues, the company expects to generate $750,000 per year in net clash inflows form the turbine. The turbine would cost $4 million and is expected to have a 20-year useful life with no residual value. Calculate the Accounting rate of return.
$750,000-[4,000,000-0/20yrs]/4,000,000=
13.75%
The Company is considering investing in a wind turbine to generate its own power. Any unsued power will be sold back to the local utility company. Between cost savings and new revenues, the company expects to generate $750,000 per year in net inflows from the turbine. The turbine would cost $4million and is expected to have a 20-year useful life with no residual value. Calculate the NPV using a 12% hurdle rate.
I= 12%, N= 20/7.469 X 750,000= 5,601,750-400,000=1,601750
The Bruce Company is considering investing in a wind turbine to generate its own power. Any unused power will be sold back to the local utility company. Between cost savings and new revenues, the company expects to generate $750,000 per year in net cash inflows from the turbine. The turbine would cost $4 million and is expected to have a 20-year useful life with no residual value. Calculate the internal rate of return (IRR).
4,000,000/750,000=5.33
NPV
Indicates wheter the asset will earn the company’s minimum require rate of return
Shows the excess or deficency of the asset’s present value of net cash inflows over the cost of the initial investment
IRR
Incorporates the time value of money and the asset’s net cash iflows over its entire life
Computes the project’s unique rate of return
No additional steps needed for capital rationing decsions
After a company has made an investment in a capital assets, what will it conduct to compare the actual net cash inflows to the project net cash inflows?
Post-audit
Examples of capital budgeting investments include all of the following except
Paying bonuses to the sales force
Customizing a fleet of new delivery vehicles
Installing a new computer system
building a factory
Which of the following affects the present value of an investment?
- The interest rate
- Number of time periods for the investment
- Whether the investment proceeds will be paid in one lump sum or in equal payments
- All of the above
When making capital rationing decisions, the size of the initial investment required may differ between alternative investments. The profitability index can be used in combination with which of the following methods to help managers choose among alternatives?
Net present value
Which of the following is true regarding capital rationing decisions?
- Companies should always choose the investment with the shortest payback period
- Companies should always choose the investment with the Highest NPV
- Companies should always choose the investment with the highest ARR.
- NONE OF THE ABOVE
The internal rate of return is
The interest rate at which the net present value of the investment is zero.
Which of the following methods uses accrual accounting rather than net cash flows as the basis for calculations
Accounting rate of return
Which of the following methods does not consider the investment’s profitability?
Payback
Which of the following is the most reliable method for making capital budgeting decisions?
Net Present value
Assume the Ernest Corporation has a required hurdle rate of 14% for all new investments. What does this hurdle rate mean?
If a potential investment has an IRR of 14% or higher, it will be analyzed futher.
Independent vs Mutually exclusive
looking at opportunity costs, consider the analysis of Projects A and B. Assume that Project A has a potential return of $100,000, while Project B will only return $80,000. Since A and B are mutually exclusive, the opportunity cost of choosing B is equal to the profit of the most lucrative option (in this case, A) minus the profits generated by the selected option (B); that is, $100,000 - $80,000 = $20,000. Because option A is the most lucrative option, the opportunity cost of going for option A is $0.
Mutually exclusive vs Independent
If available Projects A and B each cost $40,000 and Project C costs only $10,000, then Projects A and B are mutually exclusive. If the company pursues A, it cannot also afford to pursue B and vice versa. Project C may be considered independent. Regardless of which other project is pursued, the company can still afford to pursue C as well. The acceptance of either A or B does not impact the viability of C, and the acceptance of C does not impact the viability of either of the other projects.
On March 31, the purchasing manager at Reynold Plastics purchased a greater quantity of raw materials than budgeted and paid the standard price for the raw materials. Which variance is directly impacted by the March 31 purchase?
Neither of the variances will be directly impacted.
Andrew Taylor, a production line worker at Yani Yogurt, spilled an entire vat of milk. The milk must be discarded rather than used in yogurt. Which variance is directly impacted?
Direct materials quantity variance
Mitchell Bakery uses butter in producing its pies. If the price of butter doubles, which variance is directly impacted?
Direct materials price variance
A company receives an unusually high number of orders. To complete all the orders on time, the company pays employees an extra $10 per hour for every hour of overtime the employees work. Which of the following variances will be directly impacted?
Direct labor rate variance
What two variances make up the direct labor variance?
Rate variance and efficiency variance
The unemployment rate has increased over the past year. Allison Company finds that it is able to pay new employees a lower wage per hour than when the unemployment rate was lower a year ago. Which of the following variances will be directly impacted?
Direct labor rate variance
At lean companies, employees tend to be multiskilled and cross-trained to perform a variety of tasks. These workers are valued by management and are considered to be part of the team rather than a labor force to be handled and controlled. Consequently, this
decreases the importance of direct labor standards
The variable overhead rate variance may be caused by variances in the following production inputs except
direct materials
What type of variance results when the budgeted fixed overhead costs incurred are greater than the actual fixed overhead costs?
Favorable fixed overhead budget variance
The entry to allocate manufacturing overhead costs to production involves which of the following?
Debit to work in process inventory for the standard rate of overhead times the standard quantity of the allocation base allowed for actual output
Budget committees would include all of the following people except a
Shareholder
A company expects to receive which of the following benefits when it uses its budgeting process?
- The planning required to develop the budget helps managers foresee and avoid potential problems before they occur
- The budget helps to motivate employees to achieve the company’s sales growth and cost reduction goals
- The budget provides the company’s managers with a benchmark against which to compare actual result for performance evaluation
- All of the above
Budgets are
Future oriented
Which of the following is the starting point for the master budget?
The sales budget
The income statement is part of which element of a company’s master budget?
The operating budgets
The usual starting point for a direct labor budget for a manufacturer is the
production budget
The following budgets are all financial budgets except for the
Budgeted income statement
Which of the following expenses would not appear in a cash budget?
Depreciation expense
A service company would have all of the following budgets except for:
A direct materials budget
When making decisions, managers should consider
revenues that differ between alternatives
In making short-term special decisions, the decision-maker should
Sperate variable cost from fixed costs
Which if the following cost is irrelevant to business decisions?
Sunk costs
When pricing a product, managers must consider which of the following costs?
All costs
When deciding whether to sell banana powder as is or to process further to make banana bread mix, managers should ignore which of the following?
The costs of processing the banana powder thus far
When making outsourcing decisions
The variable cost producing the product in-house is relevant
When a company is operating at its breakeven point
its total revenues will be equal to its total expenses
Total contribution margin less total fixed expenses equals
Operating income
If a company sells one unit above its breakeven sales column, then its operating income would be equal to
The unit contribution margin
The breakeven point on a CVP graph is
the intersection of the sales revenue line and the total expense line
If the sales price of a product increases while everything else remains the same, what happens to the breakeven point?
The breakeven point will decrease
What is the margin of safety?
the excess of expected sales over breakeven sales
A shift in the sales mix from a product with a high contribution margin ratio towards a product with a low contribution margin ratio will cause the breakeven point to
increase
Target profit analysis is used to calculate the sales volume that is needed to
earn a specific amount of net operating income
Rachel runs her own hot dog stand on the U of A campus. The monthly cost of the cart rental and business permit is $300. Rachel’s contribution margin per unit is $1.50 and her contribution margin ratio is 75%. How many hot dogs does Rachel need to sell each month to break even? How much sales revenue does Rachel need to generate each month to break even?
(300+0)/1.50=200
(300+0)/.75= 400
If the cost per unit remains constant over a wide range of activity levels, the cost is most likely a:
Variable Costs
The cost per unit decreases as volume increases for which of the following cost behaviors?
Fixed and Mixed Costs
In the cost equation y=vx+fy=vx+f, what term represents the total variable cost component?
vx
Which of the following costs would most likely be a committed fixed cost for a retailer?
Lease payment of the store building
Which method helps managers visualize the relationship between the cost and the total volume of the activity?
Scatterplot
What method of cost behavior estimation are managers using when they use their judgment to classify costs as variable, fixed, or mixed?
Account analysis
The only difference between variable costing and absorption costing is in the treatment of
fixed manufacturing overhead costs
When inventories decline, operating income under variable costing will be
higher than operating income under absorption costing
The Plastic Lumber Corporation wants to predict its manufacturing overhead costs by using machine hours in a simple linear regression. All of the following statements are true except:
manufacturing overhead costs could be referred to as the explanatory variable.
Crane Manufacturing uses weighted-average process costing. All materials at Crane are added at the beginning of the production process. The equivalent units for materials at Crane would be
the units started plus the units in beginning work in process.
An equivalent unit of conversion costs is equal to:
the amount of conversion costs needed to produce one unit.
How is the cost per equivalent unit calculated?
Total costs to account for divided by total equivalent units
Equivalent units are calculated for which of the following?
Both direct materials and conversion costs
Insurance on a company’s buildings would most likely be classified as a ______ cost?
facility-level
The legal costs associated with filing a patent for a new model of scooter at a toy manufacturer is an example of which type of activity?
Product-level
Which of the following statements is false?
Activity-based costing can only be used by manufacturing firms.
Which of the following is not a good reason for a paint manufacturer to use activity-based costing?
Most costs are direct; indirect costs are a small proportion of total costs.
The cost of reworking defective products before shipping to customers would be classified as which type of quality costs?
Internal failure cost
Which of the following companies would be most likely to use a job costing system rather than a process costing system?
Legal firm
The two fundamental types of costing systems are
Process and job order costing
In a job costing system, which of the following statements about materials is not correct?
Materials used during production are always classified as direct materials.
What form is used to accumulate the costs of a job in a job costing system?
Job cost record
The formula to calculate the amount of manufacturing overhead to allocate to jobs is
predetermined overhead rate times the estimated amount of the allocation base used by the specific job.
Assigning manufacturing overhead costs and other indirect costs to jobs is called
cost allocation
If the company underestimates the amount of allocation base when calculating its predetermined manufacturing overhead rate but estimates the amount of manufacturing overhead correctly, the amount of manufacturing overhead allocated for the year will be
overalloacated
When a company uses direct labor, it traces the cost to the job by debiting
Work in Process Inventory
Which of the following statements is true?
Sunk costs are irrelevant to decisions.
Which of the following is true?
A marginal cost is the cost of making one more unit
