Chapter 4 - Decision Making (Managerial Accounting) Flashcards
Total Cost formula is in the following format:
following format:
y = A + Bx
What do the letters represent?
Total Cost = Fixed Costs + Variable Cost (X)
X is the Volume/Cost driver
All these costs must be in the RELEVANT RANGE
Basic purpose of Cost Measurement
to allocate costs of productions to units produced. Thus, provides important management decisions - especially for product pricing decisions
Fixed Costs
costs that remain constant no matter what volume aslong as its operating in the relevant range of volume
Volume/Cost driver
This is the independent variable; in other words it can be icnreased or decreased depending on how good the company’s production is. Thus, it is multiplied by the variable costs.
The amount of costs incurred largely depend on the volume of this number
Total Cost is independent or largely dependent?
Largely dependent on the other factors, esp Cost driver (which is independent)
y = A + Bx
The format of the Total Cost Formula. The point of showing it this way is to note the Y (total cost) and X (cost driver)
Y is LARGELY DEPENDENT
X is INDEPENDENT because that can actually be increased or decreased by the company’s discretion and production.
How to find Variable Cost: High-Low Method
You look at the highest and lowest observations. The difference in their cost is divided by the difference in their activities
Example of High Low
- You look at the highest cost and notice its 110k at 30k hours. The lowest is 80k at 20k hours.
-
$110k-$80k
30k - 20k hours
= $30k
10k hours
= $3 per hour is our variable costs
3. Plug it in and see if it works. After doing some algebra, we should get our fixed costs of 20k.
Using the highest observation:
110k = A + $3 (30k hours)
A = 110k - 90k = 20k
Using the lowest observation:
80k = A + $3 (20k hours)
A = 80k - 60k = 20k
Three types of product costs
- Direct Materials - Materials that are physically included in the final manufactured product
- Direct Labor - Wages paid to ONLY those employees working with the direct materials to change them from Raw to Finished Goods
- Overhead - All other costs that are related to the cost of making the product (NOT non-manufacturing or periodic costs)
Examples of Direct Materials
Say we’re manufacturing paper clips, direct materials would be the metal.
Other examples are:
- freight in
- insurance in transit
- import duties
- storage
Examples of Overhead
- Indirect Materials - Sandpaper to smooth edges of paper clips, or cleaning supplies for the assembly line
- Indirect Labor - supervisors and maintenance workers of the factory building
- Other examples: payroll taxes and fringe benefits for manuf employees, rent and depreciation on factory assets, lubricants, utilities to keep factory in operation
Prime Cost vs Conversion Cost
The Prime Costs are the direct costs: Direct Materials and Labor
Conversion Costs are costs necessary to convert the raw materials into products. So it doesnt include the direct materials, but its the Labor and Overhead.
Manufacturing vs Non-MFG costs
Manufacturing costs are the Direct Labor/Materials and Overhead
Non-MFG - Periodic expenses like:
- SGA Costs
- Marketing Costs
- Freight Out
- Re-Handling costs
Spoilage is MFG or Non-MFG cost?
Depends. if its Normal Spoilage its MFG. Non-MFG would be ABNORMAL SPOILAGE
Normal Cost System
Direct Materials and LAbor are absed on actual costs, whereas Overhead is based off a predetermined standard
Why is overhead considered “applied”?
Can’t be directly traced to the product as you can with direct material or labor.
How to calculate applied overhead
Estimated Overhead costs
Estimated direct labor cost per hours
= Predetermined Overheard Rate
X Acutal Production
= Applied Overhead
applied overhead journals
1. Record the applied overhead journals
WIP Control 300
Factory OH Applied 300 (temp)
2. Record the actual overhead when billed
Factory OH Control 500
Cash 500
3. Since we only applied 300, we’re UNDERAPPLIED:
Factory OH Applied 300
Expenses - COGS 200 (PLUG)
Factory OH Control 500
Standard flow of the cost system (w/o formulas)
Raw Materials to WIP to Finished Goods to COGS
Raw Materials formula
Beg. Raw Materials
+ Purchases
Availible Raw Materials
- Ending Raw Materials
Materials Used***
Materials Used will flow into WIP (added to Beg WIP)
WIP Formula - (#4c-6)
Beg WIP
+ Direct Materials Used
+ Direct Labor Used
+ APPLIED Mfg Overhead
= WIP Availible
(Ending WIP)
COGM***
Do NOT confuse COG Manufactured with COG Sold. COGM flows into Finished Goods (added to Beg Finished Goods)
Finished Goods Formula
Beg Finished Goods
+ COGM
Finished Goods Availible
(Ending Finished Goods)
COGS***
COGS would then be adjusted for under or overapplied OH
Adjusting COGS
COGS
+ Underapplied
(Overapplied)
COGS adjusted
When overhead is incurred, does it go to the overhead control or the applied overhead?
overhead CONTROL. The applied is just for when we allocate it to the units being produced
Flow of a cost System (write it out) w/formulas
There are two income statements for a manuf. Company:
- GAAP I/S (Absorption or Full Costing)
- Internal I/S (Direct or Variable or Prime Costing)
Basic difference between the two statements:
- For GAAP statement, the FIXED MANUFACTURING OVERHEAD is multiplied by the amount sold and placed into COGS.
- For Internal I/S: EXPENSE THE TOTAL amount of fixed overhead in period incurred. It’s NOT part of COGS.
Thus, ending income is the DIFFERENCE BETWEEN FIXED MANUFACTURING OVERHEAD
How do the ending operating incomes differ under GAAP and Internal Statement of Income?
Ending income is the DIFFERENCE BETWEEN FIXED MANUFACTURING OVERHEAD
GAAP Income Statement for a Manufacturing Company:
Absorption/Full Costing/GAAP
Sales
(COGS)***
Gross Margin
(SGA)***
Operating Income
***COGS and SGA are broken out into two components: Fixed and Variable, so would really look like this:
Sales
(Var Cogs)
(Fixed Cogs)
Gross Margin
(Var SGA)
(Fixed SGA)
Operating Income
Internal I/S for a manuf company
Direct/Variable/Prime
Sales
(VAR Cogs)
(VAR SGA)
Contribution Margin or CM
(Fixed MFG Costs)****
(Fix SGA)
Operating Income
**** Fixed MFG costs is the big difference from a normal GAAP statement. In GAAP, the FIX mfg costs are multiplied by amount sold and placed into COGS. Here, we expense the full amount.
Why find break-even?
- Determining SALES NEEDED to break even
- Determining sales needed to achieve a particular DOLLAR PROFIT
- Detemrining sales needed to achieve a particular return
To find Break-Even in Units
Fixed Costs
Selling Price - Variable Costs***
***This is also the contribution margin
Break Even point in Units if we want to determine a certain profit or loss
Simply add the desired profit or loss to the fixed costs in the numerator (bold part is the new stuff to formula)
Fixed Costs + Profit(Loss)
Sales Price - Variable Costs
Break even in Sales Dollars
Fixed Costs
Contribution Margin/Sales Price***
This is also the contribution margin ratio
Break-even in sales dollars to find a certain profit or loss:
Simply add the desired profit or loss to the fixed costs in the numerator (bold part is the new stuff to formula)
Fixed Costs + Profit(Loss)
Contribution Margin/Sales Price
Wot is the contribution margin
Think of it like the Gross Profit.
Sales - Variable COGS - Variable SGA
What is the Contribution MArgin Ratio
Think of the Gross Profit Ratio: Instead of GP as numerator, it’s the CM instead obviously.
Contribution Margin
Sales Price
This is the denominator to find Break-Even in Sales Dollars
Say we prepare a budget:
- Projected units to sell: 100
- Selling price: $10 Per Unit
- VC per unit: $6
- FC per period (not per unit obv): $300
What would be the direct cost stmnt? Also, point out what number needs to be changed to break even
Sales 1000
Less: Variable Costs (600)
Contribution Margin 400***
Fixed Costs (300)
Operating Profit 100
*** If we want to break even, our contribution margin must equal the fixed costs.
Say we prepare a budget:
- Projected units to sell: 100
- Selling price: $10 Per Unit
- VC per unit: $6
- FC per period (not per unit obv): $300
What is the break-even point in units?
4
300 fixed costs
$10 SP - $6VC
=
300
75 units
Say we prepare a budget:
- Projected units to sell: 100
- Selling price: $10 Per Unit
- VC per unit: $6
- FC per period (not per unit obv): $300
Break-even point in Sales Dollars?
.4
300 fixed costs
400CM/1000Sales
=
300
$750
