Final Flashcards
Manufacturing Costs
All costs associated with the manufacturing process, including:
Raw materials
Wages
Utilities
Maintenance
Property Tax
Work In Progress Account
Accumulates manufacturing costs for partially completed goods. Includes direct materials, direct labor, and manufacturing overhead. Production has started, but not complete.
Finished Goods
Completed goods costs transferred from WIP. Any other cost is a selling expense. Unsold finished products, includes direct materials, direct labor, and manufacturing overhead
Cost of Goods sold
When items are sold, the cost of the items are transferred to this account (Credit FG and Debit COGS).
Contribution Margin
Amount by which revenue exceeds variable costs.
In Total: Sales Revenue - Total Variable Costs
Per Unit: Unit Sales Price - Variable Costs per Unit
Ratio: (Unit Sales Price - Variable Cost per Unit)/Unit Sales Price
or
(Sales - Total Variable Costs)/Sales
Margin of Safety
Actual Sales Volume - Break Even Sales Volume
Variable Costs
Change based on activity volume. Examples include fuel expense, etc.
Fixed Costs
Don’t Change based on activity volume. Examples include Depreciation expense, Admin Salary, etc.
Required Sales Volume
Number of sales needed to reach target income.
In Units: (Fixed Costs + Target Income)/Unit Contribution Margin
In Dollars: (Foxed Costs + Target Income)/Contribution Margin per unit
Operating Income
Margin of Safety * Contribution Margin Ratio
Break Even Point
Point where operating income = 0. Revenue - VC - FC = 0. Prior to the BE point, each dollar of revenue covers some fixed cost. After breakeven, each dollar increases operating income
Incremental Costs
The costs associated with making different decisions. We do not include irrelevant costs such as sunk costs or normal fixed costs when determining which path is the best path for the future
Out of Pocket Costs
Costs that have not yet been incurred and may vary among possible courses of action
Sunk Costs
Costs that already have been incurred prior to the new decision. Cannot affect the future decision, so therefor it is irrelevant
Opportunity Costs
The cost for choosing to do one option over another. benefit that could have been obtained by pursuing an alternative course of action
Budgeting
Comprehensive financial plan setting forth the expected route for achieving the financial goals of the business
Elements of the Master Budget
- Prepare a sales forecast
- Prepare budgets for production, manufacturing costs, and operating expenses
- Prepare a budgeted income statement
- Prepare a budgeted Cash Flows
5.Prepare a budgeted balance sheet
Budget Output when production levels differ
Need to use a flexible budget, which allows us to examine per unit costs as oppossed to a total amount of money spent
Capital Budget
Budgeting for capital investment decisions
Purchasing plant assets
Develop new product line
Buy a subsidiary
Project Selection
Things to examine: Payback period, Average Rate of Return, Average Investment, Future Cash Flows, Discount Rate.
Average Return on Investment
(Initial Investment + Salvage Value)/2
Net Present Value
The value of investment modified by discount rate and the future cash flows as the power of the dollar changes
Discount Rate
The value of the dollar will drop in the future. We need to “discount” the value of cash in the future by using some amortization calculator values.
Principles of Managerial Accounting
Assigns Decision Making Authority
Info to Make and Support Decisions
Provides a Mechanism to Reward Performance
Financial vs Managerial Accounting
Provides internal info
non-standard reports
No standards
Reporting done of just one segment of company
any time period
Managers are primary users
Prime Costs
Costs associated with stuff consumed in production, like direct materials and direct labor
Conversion Costs
Cost of Converting raw materials, like labor and overhead
Direct Labor
Labor that directly corresponds to manufacturing
Manufacturing Overhead
Catchall for all non direct labor
Product Costs
Resources consumed to create inventory (Becomes cost of goods sold at the end)
Period Costs
Costs associated with a certain time period (Charged Directly to an expense account)
Materials cost includes
Purchase price of materials, materials on hand, and unprocessed materials
Flow of Production Costs
- Direct Materials are purchased (Debit Materials Inv)
- Direct Materials are used (Debit WIP Inv)
- Direct Labor is used (Debit direct labor, and eventually credit DL and debit WIP inv)
- Manufacturing Overhead is used (debit Man OVH and WIP)
- Goods are finished (Credit WIP Debit Finished Goods INV)
- Product is sold (Credit FG and Debit COGS)
COGS Calculation
Beginning finished goods + Cost of finished goods - Ending finished inventory = COGS.
Gross Profit on Sales
Sales - COGS
What report is COGS shown on?
Income statement
What report are Inventories shown on?
Balance Sheet
Volume and Cost Relationship
Fixed costs do not change total cost as volume changes, but the per unit cost will change inversely with volume. Variable costs do not change on a per unit basis, but will change total price proportionally with volume.
CVP Problem Analysis (Usually manager wants to spend more money to increase sales in some way)
- Calculate income based on current sales (Sales - Fixed Costs - (VC*Q))
- See what new income would be based on promised result and included new expense
Projected Operating income
(Projected Sales * Contr Margin) - Fixed Costs
Cost of Finished Goods Manufactured Equation
WIP Beginning Inventory + Total manufacturing costs - ending WIP inventory
What is not a part of manufacturing overhead?
Any cost that can be associated with direct involvement in the manufacturing process, like direct materials or direct labor
What information is not relevant when doing incremental analysis on examples like special orders
the firms fixed production costs for its normal manufacturing quantities
Elements in a Financial Budget
Capital Expenditures
Debt Service
Prepayments
Elements in an Operating Budget
Customer Service
Sales
Production
Cost of goods manufactured and COGS
Selling and admin expense budget
Cash Budget
How to get net cash flow from NPV
If you add NPV to Initial Investment, you can get the total cash inflow.
