Final Flashcards
Financial accounting
- provides info. designed for users who are not involved with day to day management of the business (provers of capital: investors/creditors - gov/ regulators (SEC, FTC)
- summarized by fin. stmts in accordance with GAAP
- Fin. stmts subject to audit and public dissemination for publicly belt companies
- fin. stmts provide info that is historical in nature
Financial accounting
- provides info. designed for users who are not involved with day to day management of the business (provers of capital: investors/creditors - gov/ regulators (SEC, FTC)
- summarized by fin. stmts in accordance with GAAP
- Fin. stmts subject to audit and public dissemination for publicly belt companies
- fin. stmts provide info that is historical in nature
Financial accounting
- provides info. designed for users who are not involved with day to day management of the business (provers of capital: investors/creditors - gov/ regulators (SEC, FTC)
- summarized by fin. stmts in accordance with GAAP
- Fin. stmts subject to audit and public dissemination for publicly belt companies
- fin. stmts provide info that is historical in nature
Managerial accounting
- provides info. designed for use by managers, officers, employees to improve business operations
- no standardized info requirements - not governed by GAAP - bc info depends what mgmt wants to know
- typically includes more detailed info
- not subject to audit or public dissemination
- commonly includes budgetary info and forecasts
Managerial accounting
- provides info. designed for use by managers, officers, employees to improve business operations
- no standardized info requirements - not governed by GAAP - bc info depends what mgmt wants to know
- typically includes more detailed info
- not subject to audit or public dissemination
- commonly includes budgetary info and forecasts
FIN/MAN? - to better understand how individual product lines are selling in various geographic locations
Managerial information is a better source
FIN/MAN? - to identify the % markup on cost on each of numerous products sold by a company?
Mangerial information
FIN/MAN? - To identify the total gross margin % on all company sales over the last 12 months?
Financial information better source
FIN/MAN? - to anticipate the amount of borrowings required to support operations over the next 6 months?
managerial information
FIN/MAN? - to calc the P/E ratio for the company’s stock at a certain market price based on historical earnings
Financial information
FIN/MAN? - To project how many units of sales are required to generate a 20% increase in gross margin for the next year?
Managerial information
FIN/MAN? - to determine the amount of bonuses due certain sales personnel based on the achievement of individual sales quotas?
Managerial information
FIN/MAN? - to understand how a company has generally been financed to date?
Financial information
FIN/MAN? - to evaluate how a company has generally been financed to date
Financial information
FIN/MAN? - To evaluate a company’s overall liquidity as of the end of the last fiscal year?
Financial information
FIN/MAN? - To determine and propose specific job terminations department by department in implementing a cost reduction plan
Managerial information
FIN/MAN? - to better understand how individual product lines are selling in various geographic locations
Managerial information is a better source
—income stmt shows gross information - not information one each product line - thats in mgmt
FIN/MAN? - to identify the % markup on cost on each of numerous products sold by a company?
Mangerial information
FIN/MAN? - To identify the total gross margin % on all company sales over the last 12 months?
Financial information better source
—get information on income stmt - historical information on gross sales for 12 months
FIN/MAN? - to anticipate the amount of borrowings required to support operations over the next 6 months?
managerial information
–forecasts done by mgmt for budgeting to support operations for next 6 months
FIN/MAN? - to calc the P/E ratio for the company’s stock at a certain market price based on historical earnings
Financial information
–found using historical earnings per share in income stmt
FIN/MAN? - To project how many units of sales are required to generate a 20% increase in gross margin for the next year?
Managerial information
FIN/MAN? - to understand how a company has generally been financed to date?
Financial information
—information on balance sheet
FIN/MAN? - To determine and propose specific job terminations department by department in implementing a cost reduction plan
Managerial information
Product costs
costs associated with goods/services offered to customers
period costs
all other costs of operating - “operating expenses
or “selling and administrative expenses”
For a merchandising business (like walmart)
PRODUCT COSTS - cost of inv. purchased for resale
inv. XXX
cash XXX
-when inv. is sold it becomes an expense
Cost of goods sold XXX
inv. XXX
PERIOD COSTS - selling and admin. costs
selling exp XXX
cash/payable XXX
—an exp in the period it is incurred
FOR PRODUCT COSTS
–cost not always an expense - buy inv. it is an asset (first goes on balance sheet) - becomes an expense as it is sold (then to income stmt)
FOR PERIOD COSTS
–recognized as expenses in period incurred (income stmt)
For a manufacturing business (furniture store)
—PRODUCT COSTS
PRODUCT COSTS - all costs of manufacturing the product to be sold by the business
—All costs of making the product
- Direct MATERIAL cost (spring, cushion, foam)
- Direct LABOR cost (assemble the furniture)
- MANUFACTURING OVERHEAD COSTS
a. ) indirect material costs - factory maintenance supplies, production supplies
b. ) indirect labor costs - involved in manufacturing but don’t actually touch - supervisors, inspectors, equipment maintenance personnel, product designers and engineers
c. ) other overhead costs - factory rent, depreciation, utilities, insurance, property taxes, depreciation of equipment
Mnfg overhead - all costs that you wouldn’t have if you weren’t making a product
For a manufacturing business (furniture store)
—PRODUCT COSTS
PRODUCT COSTS - all costs of manufacturing the product to be sold by the business
—All costs of making the product
- Direct MATERIAL cost (spring, cushion, foam)
- Direct LABOR cost (assemble the furniture)
- MANUFACTURING OVERHEAD COSTS
a. ) indirect material costs - factory maintenance supplies, production supplies
b. ) indirect labor costs - involved in manufacturing but don’t actually touch - supervisors, inspectors, equipment maintenance personnel, product designers and engineers
c. ) other overhead costs - factory rent, depreciation, utilities, insurance, property taxes, depreciation of equipment
Mnfg overhead - all costs that you wouldn’t have if you weren’t making a product
Accounting for PRODUCT costs in a manufacturing business
Asset first —> expense as sold
–these costs are accounted for as a cost of “inventory” until product is sold, and then expensed as “cost of goods sold”
Three categories/phases of inv. in manufacturing bus.
- RAW MATERIALS INVENTORY
- WORK IN PROGRESS INVENTORY (WIP)
- –includes labor, equipment, and other costs - FINISHED GOODS INV.
* then COST OF GOODS SOLD
Balance sheet for manufacturing business
Cash XXX
A/R XXX
Inv:
raw materials XXX
WIP XXX
Finished goods XXX
---under inv. are moved to cost of goods sold as an exp. as they are sold
All other costs in selling and admin. expensed under Gross Margin on income stmt as (operating exp. or others) in period incurred
Period costs examples
- salaries of sales secretarial staff
- janitorial supplies for admin office space
- building rent if 80% used for manufacturing and 20% for selling - the 20% period cost
- depreciation of admin and office furniture
- CEO salary
- cost of acc salary
- copy machine costs in sales department
Product cost examples
- -direct materials used in manufacturing - raw materials
- -depreciation of manufacturing equipment - overhead costs - WIP inv.
- -product quality control inspector’s salary - Overhead costs - WIP inv.
- -factory line workers wage - direct labor costs - WIP inv.
- -manufacturing VP bonus - overhead - WIP inv.
- -property taxes on manufacturing equipment - overhead - WIP inv.
- -building utility cost - overhead - WIP inv.
- -manufacturing supervisor salaries - overhead - WIP
T/F ALL MATERIAL purchases included in raw materials inv. upon purchase
TRUE - both direct and indirect material purchases are included in raw materials inv.
–utility costs should be allocated for utilities over manufacturing part of building and sales portion
T/F manufacturing overhead costs always recorded as WIP inv.
TRUE
Service business - product costs
PRODUCT COSTS
–toward service is asset, not an expense until you are billed for the service
Importance of understanding company’s product costs
–Financial reporting purposes
Product costs reflected as asset (inv.) rather than expense until inv. is sold
Importance of understanding company’s product costs
–Managerial purposes:
managers need to know and understand their company’s product costs to:
- establish a product sales price (to make profit)
- understand why company is profitable or not
- determine which of a variety of products to emphasize in marketing
- consider ways to reduce costs
CANT INTELLIGENTLY OPERATE A BUSINESS W/O KNOWING THE COST OF YOUR PRODUCT
Manufacturing product cost ACCUMULATION METHODS
- Process costing
2. job order costing
Process costing - to determine product costs
method that is commonly used by companies that manufacture LARGE numbers of STANDARDIZED products
General Mills: Cheerios, wheaties - have separate factories to produce each cereal - have to know COST PER BOX
Take: -manufacturing costs (for a set time) XXX -direct materials XXX -direct labor XXX -mfg overhead XXX TOTAL = XXX
TOTAL COSTS/ # BOXES PRODUCED
–gives average price per box
Process costing - to determine product costs
method that is commonly used by companies that manufacture LARGE numbers of STANDARDIZED products
General Mills: Cheerios, wheaties - have separate factories to produce each cereal - have to know COST PER BOX
Take: -manufacturing costs (for a set time) XXX -direct materials XXX -direct labor XXX -mfg overhead XXX TOTAL = XXX
TOTAL COSTS/ # BOXES PRODUCED
–gives average price per box
Job order costing - for manufacturing determining costs
Used by companies that make a VARIETY of diff. products where process method of averaging costs over # units produced would not distinguish the unique costs of diff. products
- –one factory makes variety of products
- –manufacturing costs are accumulated by separate product orders, runs or bathes (“job orders”) and averaged only over # of common units produced within that job
Job order costing - for manufacturing determining costs
Used by companies that make a VARIETY of diff. products where process method of averaging costs over # units produced would not distinguish the unique costs of diff. products
- –one factory makes variety of products
- –manufacturing costs are accumulated by separate product orders, runs or bathes (“job orders”) and averaged only over # of common units produced within that job
Examples that would use process costing methods
- -oil refinery
- -peach farm
- -oriental rug manufacturer (depends if same run(process) if unique rugs (job order)
- -door manufacturer
auto manufacturer - YES bc would have separate factories making the diff. cars
Examples that would use job order costing methods
- -home construction company
- -custom jewelry manufacturer
Examples that would use job order costing methods
- -home construction company
- -custom jewelry manufacturer
Flow of costs in manufacturing business (in a t chart - first is debit and last is credit)
INV. - RAW MATERIALS
mater. purch. XXX(DR)
direct mat. put into production XXX (CR) —> (this # is starting balance for WIP inv.)
INV - WIP # from Raw mat. XXX (DR) Direct labor costs XXX (DR) Applied overhead XXX(DR) Production completed XXX(CR) ---> (this # is starting balance for finished goods inv)
INV. - FINISHED GOODS
# from WIP XXX (DR)
Product sold XXX (CR) —> (this # becomes debit of cost of goods sold)
COST OF GOODS SOLD # from finished goods
- –accumulated costs added at each step!
- –main step is WIP - where most accumulation takes place
General ledger for WIP inv.
INV. - WIP DM XXX DL XXX MfgOV XXX --total is debit --balance is combined cost for ALL manufacturing costs we have at this time in producing!!
Subsidiary ledger
- -is accumulating all 3 costs (DM, DL, MfgOV) for EACH job
- -subsidiary ledger for direct materials - subsidiary ledger for direct labor - subsidiary ledger for overhead
- –general ledger is just the balance for each subsidiary ledger - which adds to be the balance for WIP inv.
- -TOTAL of all jobs currently in progress should equal BALANCE in general ledger WIP inv.
Job order cost example with furniture business
Furniture business makes variety of furniture and uses job order cost system
–prepare journal entries and update job sheet!!
- Raw materials = 50,000 on account (40,000 DM and 10,000 Indirect materials) placed in raw materials inv. storage area
Raw materials inv. 50,000
A/P 50,000
- Job #352 1/1/X1 - build 5 oak tables
- -employee takes authorized materials requisition form (#10025) to raw materials storage to obtain direct materials
- –cost of DM for Job #351 = $1500
Job order cost example with furniture business
Furniture business makes variety of furniture and uses job order cost system
–prepare journal entries and update job sheet!!
- Raw materials = 50,000 on account (40,000 DM and 10,000 Indirect materials) placed in raw materials inv. storage area
Raw materials inv. 50,000
A/P 50,000
- Job #352 1/1/X1 - build 5 oak tables
- -employee takes authorized materials requisition form (#10025) to raw materials storage to obtain direct materials
- –cost of DM for Job #351 = $1500
WIP inv. 1500
raw materials inv. 1500
Job order cost example with furniture business ( 1 )
Furniture business makes variety of furniture and uses job order cost system
–prepare journal entries and update job sheet!!
- Raw materials = 50,000 on account (40,000 DM and 10,000 Indirect materials) placed in raw materials inv. storage area
Raw materials inv. 50,000
A/P 50,000
- Job #352 1/1/X1 - build 5 oak tables
- -employee takes authorized materials requisition form (#10025) to raw materials storage to obtain direct materials
- –cost of DM for Job #351 = $1500
WIP inv. 1500
raw materials inv. 1500
Furniture job order cost example ( 2 )
- employee constructing 5 oak tables companies work on 1/15/X1 and submits to acc. department his semi-monthly time card (#3358)
–shows all 80 hours of labor devoted to completion of tables
(must distinguish wage hours and cost per job - often working multiple jobs at a time)
–through a TIME CARD - shows hours per job
–employee paid semi-monthly $20 per hour
WORKED 80 HOURS FOR $20 PER HOUR
WIP inv. 1600
cash (Wage payable) 1600
–also could involve employee and employer payroll tax withholdings!!
- during production, employee requisitioned form #10042 from raw materials storage for various INDIRECT MATERIALS (sandpaper)
- -cost total $150 to be used on construction of 5 oak tables plus other jobs over next month
theoretical entry: (what u would do for DM)
WIP INV. 150
raw materials inv. 150
CANT DO BC UPDATING GENERAL LEDGER AND SUBSIDIARY LEDGER AT BOTH TIMES - DONT KNOW HOW MUCH TO ALLOCATED TO JOB #351s JOB COST SHEET
ACTUAL ENTRY:
Manufacturing overhead 150
raw materials inv. 150
manufacturing overhead is…
HOLDING ACCOUNT
—temporary account to hold costs UNTIL we determine how to allocate cost to specific job!
Furniture job order cost example ( 3 )
- during production of job #351 employee requisition (#10047) from raw materials for DIRECT MATERIALS (glue, nails)
- –cost $50 for 5 oaks and other jobs over month
- -can’t count how many squirts of glue or nails used
manufacturing overhead 50
raw materials 50
–account for the direct materials like you would for indirect materials
- other manufacturing overhead costs for #351 and all other jobs during month
- -supervisor salary, manufacturing utility costs, depreciation of manufacturing equipment
- -costs would also go in holding “manufacturing overhead: until can apply to individual job
manufacturing overhead XXX (DR)
cash XXX (CR)
Salary payable XXX (CR)
Accum. depreciation XXX (CR)
Applying manufacturing overhead to WIP inv. as shown in subsidiary ledger to general ledger
MANUFACTURING OVERHEAD SUBS. LEDGER
indirect materials XXX (DR)
indirect labor XXX (DR)
other overhead XXX (DR)
credit Amt (for job) XXX --> moves to WIP inv. for the job as "applied overhead"
WIP INV GENERAL LEDGER
DM XXX
DL XXX
Applied overhead XXX (amt that was debited in overhead)
—use estimation to apply holding amounts to WIP and job cost sheets
—PREDETERMINED OVERHEAD RATES
Predetermined overhead rate
a
Predetermined overhead rate ( STEP 1 )
STEP 1: Mgmt must first identify some activity which can be separately measured job by job and bears some correlation with manufacturing overhead costs (A driver)
- –ex. DIRECT LABOR HOURS - commonly used activity in application of manufacturing overhead bc can be measured JOB BY JOB thru time cards and often correlates with overhead costs
- -Jan = $360,000 COST / 24,000 HRS = $15/hr
- -for every hr. labor hours increase = increase in manufacturing costs
- -in this way we have identified a measurable activity that has a relationship with dollar value of overhead costs - can use as basis for allocating costs
Predetermined overhead rate ( STEP 2 )
Found measurable activity, now calc. an overhead rate for the future based on prospective or budgeted overhead costs and budgeted direct labor costs
(Budgeted overhead costs for next month) / (budgeted direct labor hours for next month)
= $402,800 / 26,500 hr. = $15.20/hr. = PREDETERMINED OVERHEAD RATE
Predetermined overhead rate ( STEP 3 )
“Predetermined mfg. overhead rate” of $15.20 per direct labor hour is then used to APPLY OVERHEAD to each job in produced based on ACTUAL # OF LABOR HOURS incurred per job as reported in employee time cards
direct labor hours X predetermined overhead rate = applied overhead for that job
80 hrs X $15.20 = $1,216
$1,216 = cost associated with manufacturing overhead for Job #351
WIP inv. 1,216
mfg. overhead 1,216
UPDATE JOB COST RECORD
JOB cost record for furniture example
JOB COST RECORD - Job #351, # units = 5
DIRECT MATERIALS
Date: 1/1/XI # 10025 Amount: $1,500
DIRECT LABOR
Date: 1/15/X1 #3358 hours: 80 rate: $20 amount: $1,600
Manufacturing overhead
Date: 1/15/X1 rate: $15.20 labor hours: 80 Amount: $1,216
TOTAL COST = $4,316 (Add up each amount)
Cost per unit: $4,316 / 5 units = $863.20
to know what to sell product must know the cost per unit!!
Furniture job order cost example ( 4 )
- Production complete on Job #351 and tables transferred to finished goods inv. storage area
Finished goods inv. 4316
WIP INV. 4316
- One of chair sold to customer for $1,400
A/R 1400
sales revenue 1400
cost of goods sold 863.20
finished goods inv. 863.20
Furniture job order cost example ( 4 )
- Production complete on Job #351 and tables transferred to finished goods inv. storage area
Finished goods inv. 4316
WIP INV. 4316
- One of chair sold to customer for $1,400
A/R 1400
sales revenue 1400
cost of goods sold 863.20
finished goods inv. 863.20
Closing manufacturing overhead in furniture job order cost example
Manufacturing overhead must be set to 0 bc it just a temporary holding account
–but rarely comes to 0 bc it is credited by an estimated budget
Cost of goods sold XXX
mfg. overhead XXX
—debit cost of goods sold bc you don’t know where leftover portion should go> jobs in WIP finished or sold already? small amt. so just do cost
manufacturing overhead XXX
cost of goods sold XXX
Predetermined overhead rate ( STEP 1 )
STEP 1: Mgmt must first identify some activity which can be separately measured job by job and bears some correlation with manufacturing overhead costs (A driver)
- –ex. DIRECT LABOR HOURS - commonly used activity in application of manufacturing overhead bc can be measured JOB BY JOB thru time cards and often correlates with overhead costs
- -Jan = $360,000 COST / 24,000 HRS = $15/hr
- -for every hr. labor hours increase = increase in manufacturing costs
- -in this way we have identified a measurable activity that has a relationship with dollar value of overhead costs - can use as basis for allocating costs
to find the measurable activity
–divide the estimated budget $ / activity(hrs)
direct labor hours = 250,000/76,000 hrs
machine hours for three months = .12, .127, .124 = closest and used!
Closing manufacturing overhead in furniture job order cost example
Manufacturing overhead must be set to 0 bc it just a temporary holding account
–but rarely comes to 0 bc it is credited by an estimated budget
Cost of goods sold XXX
mfg. overhead XXX
—debit cost of goods sold bc you don’t know where leftover portion should go> jobs in WIP finished or sold already? small amt. so just do cost
manufacturing overhead XXX
cost of goods sold XXX
indirect materials
cost goes to raw materials
–when they’re used it goes to overheated holding account until applied to WIP
DIRECT AND INDIRECT IN RAW MATERIAL COSTS
Job cost sheets are also subsidiary ledgers for accts - for WIP inv
Things that go under WIP inv.
- DIRECT MATERIAL COSTS - determined by material requisition forms noting amt. and cost of raw materials released to each job
- DIRECT LABOR COSTS - require employees to keep TIME CARDS noting # hours worked on specific job
- MANUFACTURING OVERHEAD COSTS - applied on estimated basis using predetermined overhead rate on some activity
- -direct labor hours, material costs, machine hours) - measured for each job
Predetermined overhead rate ( STEP 1 )
STEP 1: Mgmt must first identify some activity which can be separately measured job by job and bears some correlation with manufacturing overhead costs (A driver)
- –ex. DIRECT LABOR HOURS - commonly used activity in application of manufacturing overhead bc can be measured JOB BY JOB thru time cards and often correlates with overhead costs
- -Jan = $360,000 COST / 24,000 HRS = $15/hr
- -for every hr. labor hours increase = increase in manufacturing costs
- -in this way we have identified a measurable activity that has a relationship with dollar value of overhead costs - can use as basis for allocating costs
to find the measurable activity
–divide the estimated budget $ / activity(hrs)
direct labor hours = 250,000/76,000 hrs
machine hours for three months = .12, .127, .124 = closest and used!
using machine hours
–estimated overhead costs = $625,000 prediction for next year
–machine hours = 77,000 estimate
$625,000 / 77,000 hrs = $8.12 per hour predetermined overhead rate
actual machine hours for job = 25
(25 X $8.12) = $203 applied to job (Credit in overhead) - left over goes to cost of goods sold
Predetermined overhead rate ( STEP 2 )
Found measurable activity, now calc. an overhead rate for the future based on prospective or budgeted overhead costs and budgeted direct labor costs
(Budgeted overhead costs for next month) / (budgeted direct labor hours for next month)
= $402,800 / 26,500 hr. = $15.20/hr. = PREDETERMINED OVERHEAD RATE
Predetermined overhead rate ( STEP 3 )
“Predetermined mfg. overhead rate” of $15.20 per direct labor hour is then used to APPLY OVERHEAD to each job in produced based on ACTUAL # OF LABOR HOURS incurred per job as reported in employee time cards
direct labor hours X predetermined overhead rate = applied overhead for that job
80 hrs X $15.20 = $1,216
$1,216 = cost associated with manufacturing overhead for Job #351
WIP inv. 1,216
mfg. overhead 1,216
UPDATE JOB COST RECORD
JOB cost record for furniture example
JOB COST RECORD - Job #351, # units = 5
DIRECT MATERIALS
Date: 1/1/XI # 10025 Amount: $1,500
DIRECT LABOR
Date: 1/15/X1 #3358 hours: 80 rate: $20 amount: $1,600
Manufacturing overhead
Date: 1/15/X1 rate: $15.20 labor hours: 80 Amount: $1,216
TOTAL COST = $4,316 (Add up each amount)
Cost per unit: $4,316 / 5 units = $863.20
to know what to sell product must know the cost per unit!!
Furniture job order cost example ( 4 )
- Production complete on Job #351 and tables transferred to finished goods inv. storage area
Finished goods inv. 4316
WIP INV. 4316
- One of chair sold to customer for $1,400
A/R 1400
sales revenue 1400
cost of goods sold 863.20
finished goods inv. 863.20
Closing manufacturing overhead in furniture job order cost example
Manufacturing overhead must be set to 0 bc it just a temporary holding account
–but rarely comes to 0 bc it is credited by an estimated budget
Cost of goods sold XXX
mfg. overhead XXX
—debit cost of goods sold bc you don’t know where leftover portion should go> jobs in WIP finished or sold already? small amt. so just do cost
manufacturing overhead XXX
cost of goods sold XXX
indirect materials
cost goes to raw materials
–when they’re used it goes to overheated holding account until applied to WIP
DIRECT AND INDIRECT IN RAW MATERIAL COSTS
Job cost sheets are also subsidiary ledgers for accts - for WIP inv
Things that go under WIP inv.
- DIRECT MATERIAL COSTS - determined by material requisition forms noting amt. and cost of raw materials released to each job
- DIRECT LABOR COSTS - require employees to keep TIME CARDS noting # hours worked on specific job
- MANUFACTURING OVERHEAD COSTS - applied on estimated basis using predetermined overhead rate on some activity
- -direct labor hours, material costs, machine hours) - measured for each job
Things that go under WIP inv.
- DIRECT MATERIAL COSTS - determined by material requisition forms noting amt. and cost of raw materials released to each job
- DIRECT LABOR COSTS - require employees to keep TIME CARDS noting # hours worked on specific job
- MANUFACTURING OVERHEAD COSTS - applied on estimated basis using predetermined overhead rate on some activity
- -direct labor hours, material costs, machine hours) - measured for each job
in job order cost example - account for manufacturing supervisor’s weekly salary of $1000 as an indirect cost
Manufacturing overhead 1000
salary payable 1000
10 Oak chairs completed and transferred to finished goods - then sold
Job cost record added balance for DM, DL, and MfgOv = total cost $1,901
finished goods inv. 1901
WIP inv. 1901
Shipped to customers for sales price of 3000 on account
A/R 3000
sales rev 3000
Cost of goods sold 1901
finished goods inv. 1901
GROSS MARGIN = 3000 - 1901 = $1,099 ($109.0 per chair)
10 Oak chairs completed and transferred to finished goods - then sold
Job cost record added balance for DM, DL, and MfgOv = total cost $1,901
finished goods inv. 1901
WIP inv. 1901
Shipped to customers for sales price of 3000 on account
A/R 3000
sales rev 3000
Cost of goods sold 1901
finished goods inv. 1901
GROSS MARGIN = 3000 - 1901 = $1,099 ($109.0 per chair)
other jobs in Problem about job order system
completed 47 orders in Jan. with 7 in process at month end
- raw materials purchased on account 102,675
Raw materials inv. 102,675
A/P 102,675 - raw materials for specific job is 90,430 with 80% direct materials and rest indirect materials
WIP inv. 72,344
Mfg. overhead 18,086
raw materials inv. 90,430 - total direct labor is 24,600
WIP inv. 24,600
cash 24,600 - mfg. overhead applied at predetermined rate of $26 per DL hours of 1,640 hours (26 X 1640 = 42,640)
WIP inv. 42,640
mfg. overhead 42,640 - superviser salaries incurred and paid with indirect labor of 7000
mfg. overhead 70000
cash 7000 - Depreciation of machine for month of 5500
Mfg. overhead 5500
Accum. deprec. 5500 - selling and admin. expenses were 46,514
selling/admin. exp. 46,514
cash 46,514
CLOSE MANUFACTURING OVERHEAD
45,140 (DR)
43,290 (applied CR)
1850 (DR balance = UNDER APPLIED)
Adjust
Cost of goods sold 1850
mfg. overhead 1850
if manufacturing overhead ends with credit balance it means…
applied manufacturing overhead EXCEEDED actual manufacturing overhead costs for period
if manufacturing overhead ends with credit balance it means…
applied manufacturing overhead EXCEEDED actual manufacturing overhead costs for period
Product costs and period costs summary
PRODUCT COSTS For merchandising bus. ----inventory purchases For manufacturing bus. ----direct materials ----direct labor ----manuf. overhead
PERIOD COSTS
—selling and administrative expense when incurred
BEHAVIOR OF COSTS CHANGES WITH VOLUME
Volume (simplifying assumption) (CVP)
units of goods purchased or produced and how many of those units we actually sell
simplifying assumption
—the # units we produce or purchase will be the same as the # we sell
–Understanding how costs behave with changes in volume allows management to understand the effect on profits given changes in volume
COST VOLUME-PROFIT ANALYSIS (CVP)
- –how much profit we generate with changes in volume
- —first identify costs as variable and fixed
Variable costs
Varies in total with changes in volume
-material costs, direct labor, sales commissions
graphed is an accelerating slope with VC on x axis and # units on y axis –> diagonal up
—every increase in volume is an increase in cost at the SAME RATE
To find VC per unit, $20,000/1000 units = $20/1
HAVE A FIXED PER UNIT COST!! ---increase volume over time doesn't have to always increase cost - assume in this class it is constant
relevant range
Range or volume that is reasonably anticipated for operations
–not (0, -infinity) maybe assume (400,000 - 600,000 units)
assume that within RELEVANT RANGE VC per unit is a straight slope - constant slope
Fixed costs
costs
Fixed costs
costs which are fixed/constant regardless of changed in volume
—building rent
graph fixed costs PER UNIT rather than TOTAL fixed costs
—FC on x axis and # units on y axis
(units sold in period/fixed cost) = although fixed, per unit will change
Fixed costs are fixed in TOTAL but they VARY PER UNIT with changes in volume
—within RELEVANT RANGE a fixed cost is assumed to be FIXED throughout that range of volume - even tho in real world there is NO fixed costs perfectly
Stepped costs
increasing salaries each year
—so each year it is a fixed line - so looks like steps on the graph (salaries on x and volume per year on y) - first year 40,000 second year 80,000 third year 120,000
Assume in RELEVANT RANGE it is a fixed cost or variable - not perfect but we force it into a category with an average
- –shows CVP is not always perfect
- –show an AVERAGE fixed costs btwn 2 amounts
Mixed costs
(THIS IS IN LESSON 13)
costs which have fixed and variable portion
(x axis is total rent costs per month and y axis is vol. in sales rev. per month)
—intersection = total fixed costs portion
example
Rented building base rent and additional meant (10% of total sales rent)
–base rent at $0 vol. sales rev. = $1000 per month
–rent increases with increase in sales rev.
–intersection = total fixed cost portion
Slope = VC/unit
$1000 fixed / $10,000 change in vol. = $.10 = 10% increase VC
Analysis of fixed costs
What portion is fixed and what portion is variable
- scattergraph or visual-fit method
- High-low method
- least squares method (in adv. class)
Example with scattergraph method to analyze fixed costs
management believes utility costs are mixed in behavior with changes in vol. Determine if they are mixed and calc. VC and FC with both scattergraph and high-low method
Example with scattergraph method to analyze fixed costs
management believes utility costs are mixed in behavior with changes in vol. Determine if they are mixed and calc. VC and FC with both scattergraph and high-low method Month - # units produced - utility costs Jan - 10,000 - $17,000 Feb. - 7000 - 14000 Mar. - 15000 - 24000 Apr. - 8000 - 15,000 May - 13,000 - 20,000 Jun - 12,000 - 18,000
SCATTERGRAPH METHOD
plot them on graph with total utility costs on x axis and vol. in thousands on y axis (# units produced)
—connect dots with a line of best fit - choose 2 points that are most on that line (Jan. mar)
Jan = ($17000, 10000) Mar = ($24000, 15000)
–difference = ($7000, 5000)
can see variable portion, increase vol = increase cost
- -try to make it straight line to find fixed
- -intersection pt. at 0 vol. (y intercept) = $3000 cost - $3000 = FIXED COST COMPONENT
- –find SLOPE to find VARIABLE COST COMPONENT (7000 / 5000) = $1.40 VC/unit
TOTAL utility costs = VC + FC
March = $24,000 total = (VC, $1.40 X 15,000 units) + X(FC)
$24,000 = $21,000 + X
X = $3000 fixed costs
not perfect! approximation method to determine!!
example with high-low method to analyze fixed costs
management believes utility costs are mixed in behavior with changes in vol. Determine if they are mixed and calc. VC and FC with both scattergraph and high-low method Month - # units produced - utility costs Jan - 10,000 - $17,000 Feb. - 7000 - 14000 Mar. - 15000 - 24000 Apr. - 8000 - 15,000 May - 13,000 - 20,000 Jun - 12,000 - 18,000
HIGH-LOW METHOD
use same graph but instead of trying to make the line fit the points, make the line so it passes through the high point and the low point
Mar = ($24000, 15000 units)
Feb = ($14000, 7000 units)
SLOPE = VC PER UNIT = $10,000
example with high-low method to analyze fixed costs
management believes utility costs are mixed in behavior with changes in vol. Determine if they are mixed and calc. VC and FC with both scattergraph and high-low method Month - # units produced - utility costs Jan - 10,000 - $17,000 Feb. - 7000 - 14000 Mar. - 15000 - 24000 Apr. - 8000 - 15,000 May - 13,000 - 20,000 Jun - 12,000 - 18,000
HIGH-LOW METHOD
use same graph but instead of trying to make the line fit the points, make the line so it passes through the high point and the low point
Mar = ($24000, 15000 units)
Feb = ($14000, 7000 units)
SLOPE = VC PER UNIT = $10,000(diff. in cost - increase in cost) / 8000 (change in vol.)
$10000 / 8000un. = $1.25 per unit
TOTAL COST = VC + FC At high point: march $24,000 = ($1.25 X 15000 units) + FC 24000 = 18750 + FC FC = 5250 ( it is fixed so should be same regardless of vol. - check using low point)
at low point: Feb.
$14,000 = ($1.25 X 7000 units) + fC
14000 = 8750 + FC
FC = 5250
SCATTERGRAPH IS BETTER BC IT TAKES AVERAGE OF DATA WHERE HIGH LOW ONLY USES TWO POINTS
CVP ANALYSIS - GRAPH OR EQUATION APPROACH
CVP or break-even analysis with graphing method
Vol. in thousands (# units produced and sold) on y axis - total costs and total revenues on x axis
- -have fixed cost line which is straight (at $120,000)
- -have total cost line (FC + VC_
- -have sales revenue line (sell for $80 per unit)
SLOPE = VC/unit = $20
slope = sales price per unit
$160,000 / 2000 units = $80 per unit
Breakeven point is where revenues = total costs
–look at graph where the sales rev. line intersects with the total cost line
= 2000 units to breakeven
CVP or break-even analysis with equation method
revenue = total costs (how many units to sell)
Sales revenues - VC - FC = 0 (NI)
($80 X 2000) - ($20 X 2000) - $120,000 = 0
160000 - 40000 - 120000 = 0
–must sell 2000 units to breakeven
CVP or break-even analysis with equation method
revenue = total costs (how many units to sell)
Sales revenues - VC - FC = 0 (NI)
($80 X 2000) - ($20 X 2000) - $120,000 = 0
160000 - 40000 - 120000 = 0
–must sell 2000 units to breakeven
Calc. profit or loss (CVP analysis)
graphically look at vol. up to total cost line and total revenue line
- –profit = total rev. at point in vol - total cost at pt
- –for 4000 units = $320,000 - 200,000 = 120,000 profit
Calc. with equation at 4000 units of volume
SALES REV - VC - FC = NI
(80 X 4000) - (20 X 4000) - (120,000) = X
320000 - 80000 - 120000 = X
120000 = X
T/F fixed cost per unit decreases with increases in volume
TRUE - fixed costs are constant but FIXED COSTS PER UNIT are effected by volume
T/F Variable cost per unit assumed to be fixed within relevant range
FALSE
T/F direct labor costs are usually a variable cost
TRUE
T/F mixed costs have both VC and FC components
TRUE
T/F VCP analysis requires all costs (product and period) to be distinguished as perfectly fixed or variable within relevant range
TRUE
T/F VCP analysis requires all costs (product and period) to be distinguished as perfectly fixed or variable within relevant range
TRUE
SLOPE =
SLOPE = VC/unit = (change cost $) / (change vol. units)
ALWAYS $ / # units
Scatterplot method in CVP analysis uses…
a line of best fit to see correlation btwn costs (x) and volume (y)
T/F as the volume of units sold decreases within relevant range the Fixed costs per unit increases
TRUE
T/F as the volume increases within relevant range, the Variable cost per unit remains same
TRUE
T/F Factory utility costs would be a fixed cost
TRUE
—not office building rent or direct material costs in manufactured product
T/F Factory utility costs would be a fixed cost
TRUE
—not office building rent or direct material costs in manufactured product
LINES ON GRAPH FOR CVP ANALYSIS
SALES REVENUE LINE
—starts at (0, 0) in the lower left corner
TOTAL COST LINE
- –starts up on the x axis at a certain point
- –this y intercept/starting point is the amount of fixed costs!!
BREAKEVEN POINT
—where two lines cross (number of volume to break even and amount in sales)
Contributed margin formula income stmt
(GAAP doesn't distinguish FC and VC)
Sales rev. xxx
Less: total VC (xxx)
contrubuted margin XXX
Less: total FC (xxx)
operating income XXX
Difference btwn sales rev. and ALL VC = amt. before fixed costs!
CVP Analysis info.
Can be used with historical info. or prospective budgeted info to respond to questions:
- How many units did we need to sell last year or do we need to sell next year to BREAKEVEN?
- How many units did we need to sell last year or do we need to sell next year to generate a CERTAIN NET INCOME?
- What effect would changes in sales price, costs, or volume have on net income?
CVP Analysis info.
Can be used with historical info. or prospective budgeted info to respond to questions:
- How many units did we need to sell last year or do we need to sell next year to BREAKEVEN?
- How many units did we need to sell last year or do we need to sell next year to generate a CERTAIN NET INCOME?
- What effect would changes in sales price, costs, or volume have on net income?
Equational approach to CVP analysis
basic equation: SR - VC - FC = NI ---SR = (sales price/unit X # units) ---VC = (VC/unit X # units) ---FC = stays constant
VC ratio
VC as a % of Sales rev.
VC = $60,000
SR = $100,000
(60,000 / 100,000) = 60%
60% X 100,000 = to find VC if didn’t tell you it was $6 per unit already
Contributed margin in CVP analysis equation
Sales revenue - variable costs
CM - FC = NI
(SR = $10/unit, VC = $6/unit) = CM = $4/unit
CM ratio (CM as a % of SR) (40% X $100,000)
Contributed margin in CVP analysis equation
Sales revenue - variable costs
CM - FC = NI
(SR = $10/unit, VC = $6/unit) = CM = $4/unit
CM ratio (CM as a % of SR) (40% X $100,000)
Find sales price/unit at anticipated sales vol. of 10,000 units to achieve NI of $100,000
sales col = 10,000 units
NI = $100,000
FC = 25,000
VC ratio = 70%
SR - VC - FC = NI
SR = (SP/UNIT X # UNITS) = (10,000 X 10000x)
VC = (70% X SP/unit X # units) = (.70 X 10000x) = 7000x
SR (10,000x) - VC (7000x) = 3000x
3000x - 25,000 = 100,000
3000x = 125,000
x = $41.67 per unit
Calc. amount of sales rev. at break-even sales rev. = $350,000
BEV SR = 350,000
NI = 50,000
CM ratio = 25%
CM - FC = NI CM = (CM RATIO X SR) = .25x .25x - FC = 0 (breakeven) --FC same no matter what volume so calc. FC at different volume (.25 X 350,000) - FC = 50,000 FC = 37,500
.25x - 37,500 = 50,000
x = $150,000
Calc. amount of sales rev. at break-even sales rev. = $350,000
BEV SR = 350,000
NI = 50,000
CM ratio = 25%
CM - FC = NI CM = (CM RATIO X SR) = .25x .25x - FC = 0 (breakeven) --FC same no matter what volume so calc. FC at different volume (.25 X 350,000) - FC = 50,000 FC = 37,500
.25x - 37,500 = 50,000
x = $150,000
Calc. Breakeven # units
FC = 39,000, VC ratio = 70%, SP/unit = $10 SR - VC - FC = NI SR = $10x VC = (70% x $10 x X) FC = 39,000
10x - 7x - 39,000 = 0
3x = 39,000 = 13,000 units
Calc. CM/Unit
BEV vol = 25,000 units, FC - $50,000, VC/unit = $7
SR - VC - FC = NI
25,000x - (25,000 X $7) - 50,000 = 0
25,000x = 225,000
x = $9 SR/unit
CM/unit = SR/unit - VC/unit
$9 - $7 = $2/unit
Calc. CM/Unit
BEV vol = 25,000 units, FC - $50,000, VC/unit = $7
SR - VC - FC = NI
25,000x - (25,000 X $7) - 50,000 = 0
25,000x = 225,000
x = $9 SR/unit
CM/unit = SR/unit - VC/unit
$9 - $7 = $2/unit
How many units must be sold at $20/unit to generate NI of $100,000?
SR = $20/unit NI = 100,000 vol = ? FC = 40,000 CM ratio = 60%
(60% X x X $20) - 40,000 = 100,000
12x = 140,000
x = 11,667 units
Calc. breakeven # of units
SR = $100/unit = $100,000 # units sold = 1000 units fixed costs = 20,000 NI = 30,000
100,000 - 1000x - 20,000 = 30,000
x = $50/unit = VC
100x - 50x - 20,000 = 0
50x = 20,000
x = 400 units to break even
Calc. breakeven # of units
SR = $100/unit = $100,000 # units sold = 1000 units fixed costs = 20,000 NI = 30,000
100,000 - 1000x - 20,000 = 30,000
x = $50/unit = VC
100x - 50x - 20,000 = 0
50x = 20,000
x = 400 units to break even
in sales rev. to break-even
($100 X 400 units) = $40,000
Find break-even sales rev.
VC ratio = 65%, FC = $14,700
SR = x
VC = .65x
FC = 14,700
x - .65x - 14,700 = 0
.35x = 14,700
x = $42,000
Find # units to produce NI $20,000
SR = 500,000
NI = $20,000
VC ratio = 60%
FC = ?
500,000 - (60% X 500,000) - FC = 20,000
200,000 - FC = 0
FC = 200,000
100x - 60x - 200,000 = 20,000
40x = 220,000
x = 5,500 units
Find # units to produce NI $20,000
SR = 500,000
NI = $20,000
VC ratio = 60%
FC = ?
500,000 - (60% X 500,000) - FC = 20,000
200,000 - FC = 0
FC = 200,000
100x - 60x - 200,000 = 20,000
40x = 220,000
x = 5,500 units
Steps of CVP analysis
1. Show detail and totals of costs A.) manufacturing (product) costs ---VC/unit - DM, DL, Mfg. Overhead (include depreciation) = total VC PER UNIT at end ---FC/month - mfg. overhead - TOTAL B.) selling and administrative costs ---VC/unit ---FC/month
- Find # units to breakeven
- then can solve for others too for profit/loss
Strategic planning
decisions of long-range questions as…
- -which products to make and sell
- -how to market the products
- -how to finance the resources necessary to achieve the organizations goals
- -consider debt or equity financing
Capital budgeting
planning for the acquisition of operational or long-term assets such as PP&E
–What PP&E we need and how to obtain them
Operational budgeting
detailed plans of immediate goals for prospective sales, production, expenses, cash flows and fin stmt results
Personal budget identifies…
Cash flows (inflows and outflows)
- -allows you to anticipate potential outflows to prioritize - to see how you spend your money
- -look at a person’s checkbook to see where priorities lie - see goals/objectives
Importance of budgeting (family/bus.)
COMMUNICATION SETTING GOALS/OBJECTIVES PROBLEM RESOLUTION COORDINATION AUTHORIZATION PERFORMANCE EVALUATION MOTIVATION
(highest problem with marriage
Benefits with BUSINESS budgeting - same as family - mgmt communications
budgetary process usually initiated with a problem with cash
Importance of budgeting (family/bus.)
COMMUNICATION SETTING GOALS/OBJECTIVES PROBLEM RESOLUTION COORDINATION AUTHORIZATION PERFORMANCE EVALUATION MOTIVATION
(highest problem with marriage
Benefits with BUSINESS budgeting - same as family - mgmt communications
budgetary process usually initiated with a problem with cash
First step in developing operational budget
to project sales volume of goods at anticipated sales price
Primary source of cash inflows comes from sales to customers - start here in budget, estimate
—expected sales volume will also determine your operating expenses - driven by ANTICIPATED SALES VOLUME
*Anticipated is important to see what happens if we meet our expected sales volume
Elements and sequencing of an operating budget - MERCHANDISING business
Sales budget - how much we expect to sell
- –> selling and admin. exp. budget
- –>inv. purchases budget
- ——->both go to Cash flow budget
cash flow budget
- –> pro-forma income stmt
- –> pro-forma balance sheet
PRO-FORMA = anticipated, estimated fin. stmts
Elements and sequencing of an operating budget - MANUFACTURING business
Sales budget - # units we expect to sell
- –>Selling/admin. budget
- –>production budget (# units we need to produce to meet sales volume budget)
- ——–>direct materials budget
- ——–>direct labor budget
- ——–>mfg. overhead budget
- —————–>cash flow budget (from steps under production budget and from selling and admin. exp budget)
cash flow budget
- –> pro-forma income stmt
- –> pro-forma balance sheet
Elements and sequencing of an operating budget - MANUFACTURING business
Sales budget - # units we expect to sell
- –>Selling/admin. budget
- –>production budget (# units we need to produce to meet sales volume budget)
- ——–>direct materials budget
- ——–>direct labor budget
- ——–>mfg. overhead budget
- —————–>cash flow budget (from steps under production budget and from selling and admin. exp budget)
cash flow budget
- –> pro-forma income stmt
- –> pro-forma balance sheet
- Make SALES BUDGET - ex.
Company makes and sells food supplement drink that comes in one pint carton.
- -one carton made by mixing water w/ 6 oz. powder mix
- -product sells for $3.00 a carton
- -budgeted sales for Sept (20,000) Oct (22,000) Nov (25,000)
SALES BUDGET
Sept. Oct. Nov.
Units to be sold 20,000 22,000 25,000
sales price/unit X $3.00 X 3.00 X 3.00
TOTAL sales rev. 60,000 66,000 75,000
UNITS TO BE SOLD - drives production budget
TOTAL SALES REV - drives cash flow budget
- Make SALES BUDGET - ex.
Company makes and sells food supplement drink that comes in one pint carton.
- -one carton made by mixing water w/ 6 oz. powder mix
- -product sells for $3.00 a carton
- -budgeted sales for Sept (20,000) Oct (22,000) Nov (25,000)
SALES BUDGET
Sept. Oct. Nov.
Units to be sold 20,000 22,000 25,000
sales price/unit X $3.00 X 3.00 X 3.00
TOTAL sales rev. 60,000 66,000 75,000
UNITS TO BE SOLD - drives production budget
TOTAL SALES REV - drives cash flow budget
- Prepare a Production budget ex.
Mgmt wants to keep balance of finished inv. on hand to 20% of following months anticipated sales vol. to be able to handle unexpected
–there are 4000 units finished goods on 8/31/x3
PRODUCTION BUDGET
Sept. Oct. Nov.
units to be sold 20,000 22.000 25000
desired ending inv.* 4,400 5000
24,400 27,000
beginning inv. (4000) (4,400)
units to be produced 20,400 22.600
*calc. based on 20% of subsequent monthly budgeted sales
PREVIOUS MONTHS DESIRED INV BALANCE BECOMES NEXT MONTHS BEGINNING INV. BALANCE!
Companies today don’t want extra inv.
–do “just in time” production to be more efficient and carry less on hand
- Direct materials budget
PRODUCT COSTS
variable costs per unit
- Direct materials budget
PRODUCT COSTS
variable costs per unit
—-direct materials
6 oz. mix $.90/unit
carton $.20/unit
—-direct labor .10/unit
—-mfg. overhead .30/unit
fixed mfg. overhead
—-per month* 7000
*amt includes 1500 of equipment depreciation/month
Mgmt. likes to have direct materials inv.. = to 30% of following months budgeted materials usage - there are 6120 6 oz. packets of mix and 6120 cartons in materials inv. on 8/31/XI
MATERIALS USAGE BUDGET
SEP. OCT.
units to be PRODUCED 20,400 22,600
(bottom # in production budget)
one 6 oz. mix and one
carton per unit produced X 1 X 1
mix and cartons to be USED 20,400 22,600
MATERIALS PURCHASE BUDGET
SEPT. OCT.
units of mix/cartons
to be USED 20,400 22.600
desired ending inv. * 6,780 ?
27,180 ?
beginning inv. (6,120) (6,780)
mix/cartons to PURCHASE 21,060 ?
price per mix/carton X 1.10 X 1.10
TOTAL material purchases $23,060 ?
- Direct labor budget example
DIRECT LABOR BUDGET
SEPT. OCT.
units to be PRODUCED 20,400 22,600
labor cost per unit X .10 X .10
TOTAL direct labor $2,040 $2,260
- Direct materials budget
PRODUCT COSTS
variable costs per unit
—-direct materials
6 oz. mix $.90/unit
carton $.20/unit
—-direct labor .10/unit
—-mfg. overhead .30/unit
fixed mfg. overhead
—-per month* 7000
*amt includes 1500 of equipment depreciation/month
Mgmt. likes to have direct materials inv.. = to 30% of following months budgeted materials usage - there are 6120 6 oz. packets of mix and 6120 cartons in materials inv. on 8/31/XI
MATERIALS USAGE BUDGET
SEP. OCT.
units to be PRODUCED 20,400 22,600
(bottom # in production budget)
one 6 oz. mix and one
carton per unit produced X 1 X 1
mix and cartons to be USED 20,400 22,600
MATERIALS PURCHASE BUDGET
SEPT. OCT.
units of mix/cartons
to be USED 20,400 22.600
desired ending inv. * 6,780 ?
27,180 ?
beginning inv. (6,120) (6,780)
mix/cartons to PURCHASE 21,060 ?
price per mix/carton X 1.10 X 1.10
TOTAL material purchases $23,060 ?
*calc. based on 30% subsequent months budgeted usage
- Direct labor budget example
DIRECT LABOR BUDGET
SEPT. OCT.
units to be PRODUCED 20,400 22,600
labor cost per unit X .10 X .10
TOTAL direct labor $2,040 $2,260
- cash flow budget example
Budget selling/admin. = $.40/unit of VC and 5000/mont FC which include $700 budgeted depreciation exp.
Assumptions for sept. cash flow budget
- -all sales on account - 60% sales collected in onto of sales with 40% in following month - no uncollectibles - A/R balance 8/31 = $21,000
- -direct materials always purchased on account with 50% paid in month of purchase and rest paid following month - A/P balance 8/31 is $10,500
- -all direct labor, overhead and selling costs paid in month incurred (not always in bus.)
- -cash balance at beginning of month is 6000 and company has no income taxes
CASH FLOW BUDGET
- cash flow budget example
Budget selling/admin. = $.40/unit of VC and 5000/mont FC which include $700 budgeted depreciation exp.
Assumptions for sept. cash flow budget
- -all sales on account - 60% sales collected in onto of sales with 40% in following month - no uncollectibles - A/R balance 8/31 = $21,000
- -direct materials always purchased on account with 50% paid in month of purchase and rest paid following month - A/P balance 8/31 is $10,500
- -all direct labor, overhead and selling costs paid in month incurred (not always in bus.)
- -cash balance at beginning of month is 6000 and company has no income taxes
CASH FLOW BUDGET
SEPT.
beginning cash 6000
ADD: collection A/R:
current month* 36,000
preceding month(beg. A/R) 21,000
63,000
deduct disbursements:
direct materials-
current month* (11,583)
preceding month(A/P beg.) (10,500)
direct labor (2,040)
mfg. overhead-
variable** (6,120)
fixed (exclude depr. of 1500) (5500)
selling/admin.-
variable*** (8000)
fixed (exclude depr. 700) (4300)
cash balance/(deficiency) 14,957
cash capitalization required 0
ending cash balance $14,957
- collections of A/R calc. at 6-% in month of sale and 40% in subsequent month (to find current month use “total sales rev.” from sales budget = ($60,000 X 60%) = $36,000)
- purchase of direct materials on account calc. at 50% in month of purchase and 50% in subsequent month (to find current month use “total material purchases” in material purchase budget = ($23,166 X 50%) = 11,583)
- *VC overhead calc. at $.30 times the # units budgeted for production (look at units to be PRODUCED in production budget = ($20,400 X $.30) = 6,120)
- **VC selling/admin. calc. at $.40 times # units budgeted for SALE - (look at sales budget for units to be SOLD = (20,000 X .40) = 8000)
START WITH BEG. BALANCE THEN PUT IN ALL INFLOWS AND OUTFLOWS TO GET AN END BALANCE
- cash flow budget example
Budget selling/admin. = $.40/unit of VC and 5000/mont FC which include $700 budgeted depreciation exp.
Assumptions for sept. cash flow budget
- -all sales on account - 60% sales collected in onto of sales with 40% in following month - no uncollectibles - A/R balance 8/31 = $21,000
- -direct materials always purchased on account with 50% paid in month of purchase and rest paid following month - A/P balance 8/31 is $10,500
- -all direct labor, overhead and selling costs paid in month incurred (not always in bus.)
- -cash balance at beginning of month is 6000 and company has no income taxes
CASH FLOW BUDGET
SEPT.
beginning cash 6000
ADD: collection A/R:
current month* 36,000
preceding month(beg. A/R) 21,000
63,000
deduct disbursements:
direct materials-
current month* (11,583)
preceding month(A/P beg.) (10,500)
direct labor (2,040)
mfg. overhead-
variable** (6,120)
fixed (exclude depr. of 1500) (5500)
selling/admin.-
variable*** (8000)
fixed (exclude depr. 700) (4300)
cash balance/(deficiency) 14,957
cash capitalization required 0
ending cash balance $14,957
- collections of A/R calc. at 6-% in month of sale and 40% in subsequent month (to find current month use “total sales rev.” from sales budget = ($60,000 X 60%) = $36,000)
- purchase of direct materials on account calc. at 50% in month of purchase and 50% in subsequent month (to find current month use “total material purchases” in material purchase budget = ($23,166 X 50%) = 11,583)
- *VC overhead calc. at $.30 times the # units budgeted for production (look at units to be PRODUCED in production budget = ($20,400 X $.30) = 6,120)
- **VC selling/admin. calc. at $.40 times # units budgeted for SALE - (look at sales budget for units to be SOLD = (20,000 X .40) = 8000)
START WITH BEG. BALANCE THEN PUT IN ALL INFLOWS AND OUTFLOWS TO GET AN END BALANCE
Find cash collections for march:
Sell cakes $10 per unit
–budgeted sales volume: Jan (25,000) Feb (30,000) Mar (35,000)
–70% sales on account and A/R expected to be collected:
50% in month of sale
35% in month following month of sale
10% in second month following month of sale
5% uncollectible
determine amount of budgeted cash inflows for march!
Cash collections in march:
–from Jan. (25,000 X $10 X 70% X 10%) = 17,500
–from Fen. (30,000 X $10 X 70% X 35%) = 73,500
–from March (35,000 X $10 X 70% X 50%) = 122,500
–cash sales in march = (35,000 X 30% X $10) = 105,000
TOTAL = $318,500
Find cash collections for march:
Sell cakes $10 per unit
–budgeted sales volume: Jan (25,000) Feb (30,000) Mar (35,000)
–70% sales on account and A/R expected to be collected:
50% in month of sale
35% in month following month of sale
10% in second month following month of sale
5% uncollectible
determine amount of budgeted cash inflows for march!
Cash collections in march:
–from Jan. (25,000 X $10 X 70% X 10%) = 17,500
–from Fen. (30,000 X $10 X 70% X 35%) = 73,500
–from March (35,000 X $10 X 70% X 50%) = 122,500
–cash sales in march = (35,000 X 30% X $10) = 105,000
TOTAL = $318,500
Problem to find cash outflow for purchase of flour to be budgeted for february
budgeted sales vol = Jan (25,000) Feb (30,000) Mar (35,000)
- -wants to maintain finished goods inv. at 30% following months sales - inv. at start of Jan. is 7000 units
- -one unit of production requires 3 lbs of flour which costs $2.00 per lb. - keep flour inv. constant with current inv. balance
- -buys raw materials on account paying 50% in month of purchase and 50% in following month
PRODUCTION BUDGET
units to be SOLD
desired end. inv*
beg. inv. balance
units to be PRODUCED
Problem to find cash outflow for purchase of flour to be budgeted for february
budgeted sales vol = Jan (25,000) Feb (30,000) Mar (35,000)
- -wants to maintain finished goods inv. at 30% following months sales - inv. at start of Jan. is 7000 units
- -one unit of production requires 3 lbs of flour which costs $2.00 per lb. - keep flour inv. constant with current inv. balance
- -buys raw materials on account paying 50% in month of purchase and 50% in following month
PRODUCTION BUDGET
Jan. Feb.
units to be SOLD 25,000 30,000
desired end. inv* 9000 10,500
beg. inv. balance (7000) (9000)
units to be PRODUCED 27,000 31,500
MATERIALS USAGE BUDGET
Jan. Feb.
units to be produced 27,000 31,500
X 3 lbs. per unit X 3 X 3
lbs. used in production 81,000lbs 94500lbs
MATERIALS PURCHASE BUDGET
Jan. Feb.
lbs. used in production 81,000 94,500
budgeted purchase
cost per lb. X $2 X $2
cost of material
purchases 162000 189000
paid on acct. X (50%) X (50%)
then add those two balances to get total outflow for purchases in feb = 175,500
Problem to find cash outflow for purchase of flour to be budgeted for february
budgeted sales vol = Jan (25,000) Feb (30,000) Mar (35,000)
- -wants to maintain finished goods inv. at 30% following months sales - inv. at start of Jan. is 7000 units
- -one unit of production requires 3 lbs of flour which costs $2.00 per lb. - keep flour inv. constant with current inv. balance
- -buys raw materials on account paying 50% in month of purchase and 50% in following month
PRODUCTION BUDGET
Jan. Feb.
units to be SOLD 25,000 30,000
desired end. inv* 9000 10,500
beg. inv. balance (7000) (9000)
units to be PRODUCED 27,000 31,500
MATERIALS USAGE BUDGET
Jan. Feb.
units to be produced 27,000 31,500
X 3 lbs. per unit X 3 X 3
lbs. used in production 81,000lbs 94500lbs
MATERIALS PURCHASE BUDGET
Jan. Feb.
lbs. used in production 81,000 94,500
budgeted purchase
cost per lb. X $2 X $2
cost of material
purchases 162000 189000
paid on acct. X (50%) X (50%)
then add those two balances to get total outflow for purchases in feb = 175,500
T/F must do material USAGE budget before you can make a materials PURCHASE budget
TRUE
–ending material usage budget gives you amt. to be used in production - which is starting amount in materials purchase budget
Does direct labor budget use units to be sold or units to be produced
units to be PRODUCED
(selling 2000 so use that in sales budget to find total sales rev. and used to start the proaction budget to find units to be produced)
–but units to be produced used in materials usage budget, materials purchase budget, and direct labor budget
Does direct labor budget use units to be sold or units to be produced
units to be PRODUCED
(selling 2000 so use that in sales budget to find total sales rev. and used to start the proaction budget to find units to be produced)
–but units to be produced used in materials usage budget, materials purchase budget, and direct labor budget
T/F if depreciation are non cash costs then they are excluded from cash flow budget
TRUE
–cash flow budget is only cash inflows and cash outflows from the company
Where does contributed capital come from on pro-forma balance sheet
found by “cash capitalization required” added up from the cash budget
Find accumulated depreciation for a company (problem 63 d.)
Depreciation - $.10/ unit PRODUCED
10025 units produced = (10025 X .10) = $1003
Finished goods inv. on pro-forma balance sheet required # units budgeted ending inv. from…
PRODUCTION BUDGET
Balance of A/P on pro-forma balance sheet comes from..
MATERIALS PURCHASED BUDGET
Balance of A/P on pro-forma balance sheet comes from..
MATERIALS PURCHASED BUDGET
Non routine business decisions
long-term - occasional - not everyday ?
- Whether to make or buy your product
- whether to accept a special customer order
- whether to discontinue or add a product line
- whether to install a new computerized accounting system
Relevant costs for non-routine decisions
relevant costs and revenues are the costs or rev. which affect out decision
—relevant costs/rev = differential costs/rev
differential costs/rev are future costs/rev
–often referred to as DIRECT COSTS and rev. of a decision alternative and are AVOIDABLE if the other option is selected
Identifying relevant costs example
Fly to Cali
- -airfare (differential cost bc varies among choices - avoidable if i drive
- -airport parking
- -auto gas/wear on car (100 miles) TAKE OFF BC THERE IS 1400 MILES IF DRIVE TO CALI SO THE DIFFERENTIAL COST IS 1300 BC THE 100 MILES IS THERE IN BOTH OPTIONS SO NOT DIFFERENTIAL
- car rental
drive to cali
- -Auto gas/wear (1400 for drive - but differential cost is 1300)
- -Auto wear in cali (500 miles)
- -las vegas fun
- -opportunity cost
Relevant costs vary btw choices you are deciding btwn - foot and hotel in cali are not relevant bc they are a cost no matter which choice you choose
Opportunity cost
foregone revenues arising from a decision alternative
–flying get to cali early to do business and make rev. - if drive won’t get there early enough to make the extra revenue - so it is an opportunity cost differentiated on the driving side option (or a foregone revenue)
Opportunity cost
foregone revenues arising from a decision alternative
–flying get to cali early to do business and make rev. - if drive won’t get there early enough to make the extra revenue - so it is an opportunity cost differentiated on the driving side option (or a foregone revenue)
Sunk costs
past costs - PAST COSTS ARE ALWAYS IRRELEVANT NO MATTER WHAT
- -paid for car to take trips should that be involved in decision process? no already paid and can’t recover cost with either decision
- -car insurance
- -spent $ on a movie - hear of a party and rather go - think choose movie bc already invest in it - NO! Cost still there no matter what - choose what you would have more fun doing - what you would benefit most from in future!
OK TO WALK AWAY FROM YOUR INVESTMENTS! BASED ON FUTURE BENEFITS!!
Non-routine decisions
1. whether to MAKE OR BUY a component part or product
ABC inc. game manufacturing company might contract out the manufacture of its chess boards.
–Malaysian company will make boards $5.10/unit
–current costs to make boards themselves:
DM = $2.50
DL = $1.50
VC overhead = .75
fixed overhead = .50 (fixed usually not per unit)
TOTAL is $5.25/unit
TOTAL w/o fixed = $4.75/unit
Fixed overhead cost per unit calc. based on a volume of 100,000 units - total fixed cost of overhead is $50,000 (changes per unit as volume increases or decreases) - will change the total manufacturing cost if vol. changes
—if production discontinues, 60% of fixed costs ($30,000 can be avoided) (other 40% is not a differentiated cost bc it can’t be avoided with either option)
Assume sales volume is anticipated 100,000 units. Would it be economically better to buy chess boards from Malaysia or make them ourselves?
Differentiated costs:
BUY MAKE
Contract cost
($5.10 X 100,000 units) 510,000
fixed supervisor salary 30,000
variable product costs
($4.75 X 100,000 units) 475,000
TOTAL COSTS 510,000 505,000
SO MAKING WOULD BE LESS EXPENSIVE
non-routine decisions
1. buy or make products example 2
Buy or make with 80,000 units
contract costs
fixed supervisory salary
non-routine decisions
1. buy or make products example 2
Buy or make with 80,000 units
BUY MAKE
contract costs
(5.10 X 80,000units) 408,000
fixed supervisory salary 30,000
Variable product costs
(4.75 X 80,000units) 380,000
TOTAL COSTS 408,000 410,000
SO BUYING WOULD BE BETTER WITH LESS VOLUME BEING SOLD
Decrease vol. = better to buy products
increase vol. = better to make yourself
–bc fixed costs are the same no matter how much volume - allocated better among more volume
At 100,000 units can also sublease space (Rent cost) for 10,000 - opportunity cost for making them bc you forego that revenue bc you need the space
BUY MAKE
contract cost
(5.10 X 100,000units) 510,000
fixed supervisor salary 30,000
Variable product cost
(4.75 X 100,000units) 475,000
opportunity cost
foregone sublease rev. 10,000
Total costs 510,000 515,000
BUYING WOULD BE BETTER
opp. cost could also be written on the buy side as a sublease rev. - whatever makes more sense to you - same net effects
non-routine decisions
2. whether to DISCONTINUE OR ADD a product line?
ABC inc had net income last yr of $85,000 which included results from cheers product line
DIFFERENTIATED COSTS
KEEP DROP
sales rev. 150,000 0
Variable product costs (90,000) 0
variable period costs (30,000) 0
contributed margin 30,000 0
DIRECT fixed costs
(product and period) (20,000) 0
income before
indirect costs 10,000
INDIRECT (allocated)
fixed/period costs (15,000) (15,000)
operating income / (loss) (5000) loss (15,000)
DIRECT fixed costs - are those associated with the product that could be dropped otherwise
INDIRECT fixed costs - will continue to have either way - it will just be allocated somewhere else - so not a differentiated cost and should be taken off bc they are there either way
—same net effect - shows a 10,000 loss if you stop production bc you would have made a 10,000 profit
Non-routine decisions
3. whether to accept a SPECIAL ORDER from a customer
ABC considering large order from important customer for 10,000 units of board game at a discounted price
Non-routine decisions
3. whether to accept a SPECIAL ORDER from a customer
ABC considering large order from important customer for 10,000 units of board game at a discounted price
–what would be lowest price possible before ABC would actually lose obey on sale given game costs:
direct materials $7.00/unit
direct labor $2.50/unit
variable overhead 1.00/unit
variable selling .20/unit
Additional overhead costs of $2000 incurred on this special order - all other fixed overhead and selling are unaffected by order
Differential PER UNIT costs of special order
Direct materials 7.00
direct labor 2.50
variable mfg. overhead 1.00
variable selling/admin .20
fixed mfg overhead
($2000 / 10,000 units) .20
total per unit cost $10.90 per unit
non-routine decisions
4. which product should be emphasized in a situation of limited critical resources?
Company manufacturers bicycles and tricycles and is successful in marketing products and can sell as many units as they produce of either product
contribution margin per unit is:
BIKE TRI
sales rev. $70 $50
variable product/period costs (40) (25)
contributed margin 30 25
fixed costs are same for either product (irrelevant bc not differentiated)
–production volume based on direct labor hours and it takes 3 hours for bicycle and 2 hours for tricycle - direct labor hours employable by company are limited due to factory size and limited capital for expansion
–make more profit with bicycles (in contributed margin) but can’t make as much volume bc they take longer
BIKE TRI
contributed margin per unit 30 25
direct labor hours required
to produce / 3 / 2
contributed margin per hour $10/hr. $12.50/hr
Make more profit with tricycles even tho they make less money per unit, but you can make more and it is more profitable per hour - so emphasize tricycles
WITH THIS QUESTION YOU FIND CONTRIBUTED MARGIN PER UNIT BY SUBTRACTING REV - VC
—THEN FIND CONTRIBUTED MARGIN PER SOMETHING (HOUR - MONTH)
non-routine decisions
4. which product should be emphasized in a situation of limited critical resources?
Company manufacturers bicycles and tricycles and is successful in marketing products and can sell as many units as they produce of either product
contribution margin per unit is:
BIKE TRI
sales rev. $70 $50
variable product/period costs (40) (25)
contributed margin 30 25
fixed costs are same for either product (irrelevant bc not differentiated)
–production volume based on direct labor hours and it takes 3 hours for bicycle and 2 hours for tricycle - direct labor hours employable by company are limited due to factory size and limited capital for expansion
–make more profit with bicycles (in contributed margin) but can’t make as much volume bc they take longer
BIKE TRI
contributed margin per unit 30 25
direct labor hours required
to produce / 3 / 2
contributed margin per hour $10/hr. $12.50/hr
Make more profit with tricycles even tho they make less money per unit, but you can make more and it is more profitable per hour - so emphasize tricycles
WITH THIS QUESTION YOU FIND CONTRIBUTED MARGIN PER UNIT BY SUBTRACTING REV - VC
—THEN FIND CONTRIBUTED MARGIN PER SOMETHING (HOUR - MONTH)
Non-routine decisions
5. whether to process a product further creating a higher grade product
Joe’s ice-cream makes and sells an ice cream brand at following per unit given a vol. of 1 million cartons per year:
sales rev. = $2.00 per unit
VC = (1.00 per unit)
FC = (.35 per unit) - (1,000,000 X .35 = 350,000 total FC)
TOTAL COST = $.65
company is considering manufacture and sale of more premium brand of ice cream by further processing existing brand with additional ingredients - additional per unit costs so differential direct materials = 1.30 per unit direct labor = .30 per unit variable overhead = .10 per unit total extra cost = 1.70 per unit
brand would be sold for $4.00/unit (current is $2.00 per unit) - no additional selling costs or fixed overhead
what would be effect on profits if 50% of the 1 million units of vol. were converted to premium production?
Diff. rev/costs/ for 500,000 units of premium
- -Diff. sales rev = $2.00 per unit ($2 more than regular)
- -diff. product costs (1.70/unit) - wouldn’t have with regular
- -diffefrential profit = $.30 per unit
500,000units X $.30 = $150,000 additional profit
Joint costs
common costs in the production of two products at diff. grades
IRRELEVANT - bc same in either decision and will be there regardless
non-routine decisions
2. whether to DISCONTINUE OR ADD a product line?
ABC inc had net income last yr of $85,000 which included results from cheers product line
DIFFERENTIATED COSTS
KEEP DROP
sales rev. 150,000 0
Variable product costs (90,000) 0
variable period costs (30,000) 0
contributed margin 30,000 0
DIRECT fixed costs
(product and period) (20,000) 0
income before
indirect costs 10,000
INDIRECT (allocated)
fixed/period costs (15,000) (15,000)
operating income / (loss) (5000) loss (15,000)
DIRECT fixed costs - are those associated with the product that could be dropped otherwise - would be avoided if you got rid of the product
INDIRECT fixed costs - will continue to have either way - it will just be allocated somewhere else - so not a differentiated cost and should be taken off bc they are there either way
—same net effect - shows a 10,000 loss if you stop production bc you would have made a 10,000 profit
Joint costs
common costs in the production of two products at diff. grades
IRRELEVANT - bc same in either decision and will be there regardless
Problem with limited shelf space for cookies and candy
-which should they stock?
Space holds 10 boxes of cookies and contribution margin per unit is $1.00
–space holds 30 candy bars with contribution margin of $.25 per unit
Cookie turnover is 4 times and candy bar turnover is 6 times
COOKIES CANDY
CM per unit 1.00 .25
# units per space 10 30
CM per inv. turn 10.00 7.50
inv. turn per month X 4 X 6
CM per month $40.00 $45.00
CANDY BARS SHOULD BE STOCKED
When is depreciation included in heavenly molds example?
we included depreciation in the total variable manufacturing cost bc we used units of production method
–if we had used a straight line method we would not have included it
when deciding to make vs. buy - he could avoid all variable manufacturing costs except depreciation and rent
–so on the diff. cost list btwn the two options, we EXCLUDED depreciation and rent bc you pay it with either option so it is not a differentiated cost
T/F higher levels of volume would decrease relevant costs to manufacture
TRUE - bc fixed costs would be allocated to more units
–more volume becomes more profitable to make yourself
Relevant costs and sunk costs
relevant - future costs that vary among decision alternatives
sunk - past costs - irrelevant
A simple tax system - income taxes
for income $0-50, on income tax
for income $51-100, tax rate = 50%
for income above $100 is 60%
how much income tax would you pay if you made…
50? = 0
51? = (1.00 X 50%) = $0.50
$100? = ($50 X 50%) = $25
You wouldn’t pay for the first 50 but would have to pay the amount for the money after and same for each section then add it
tax liability
tax base X tax rate = tax liability
base is 120 and 0-50 is 0%, 51-100 is 50%, and 101+ is 60% = 0 for first 50 = (50 X 50%) = $25 for second 50 = (20 X 60%) = 12 for rest = $37 tax liability
tax terms
taxable income - income tax taxable estate - estate tax taxable gifts - gift tax (under 14,000 not taxed) taxable purchases - sales tax taxable property - property tax
Average tax rate
tax liability / taxable income
(overall tax burden / total income)
if i make $150 = 55 / 150 = 36.7%
Average tax rate
tax liability / taxable income
(overall tax burden / total income)
if i make $150 = 55 / 150 = 36.7%
- -the 55 comes from first 50 free, second 50 tax rate is 50% and 3rd 50 tax rate is 60%
- -total - 25 + 30 = 55 tax liability
tax liability
tax base X tax rate = tax liability
base is 120 and 0-50 is 0%, 51-100 is 50%, and 101+ is 60% = 0 for first 50 = (50 X 50%) = $25 for second 50 = (20 X 60%) = 12 for rest = $37 tax liability
tax terms
taxable income - income tax taxable estate - estate tax taxable gifts - gift tax (under 14,000 not taxed) taxable purchases - sales tax taxable property - property tax
Average tax rate
tax liability / taxable income
(overall tax burden / total income)
if i make $150 = 55 / 150 = 36.7%
- -the 55 comes from first 50 free, second 50 tax rate is 50% and 3rd 50 tax rate is 60%
- -total - 25 + 30 = 55 tax liability
marginal tax rate
tax rate applied to next dollar earned
progressive tax system
as you make more income, the tax rate increases on the margin
–income taxes are progressive!!
After-tax benefit of income
- -receive $10,000 of income
- -marginal tax rate is 30%
- -what is my after tax benefit of income
(10,000 X .3) = 3,000 (10000 - 3000) = 7000
7000 after tax benefit of income
income effect vs substitution effect
income effect
–must work more to receive same after-tax income (rates increasE)
substitution effect
–substitute leisure for work bc receive too little after-income if rates get too high
After-tax cost of deduction
- -receive 10,000 of income (donate 10,000) (deductible charitable contribution)
- -marginal tax rate is 30%
- -what is my after tax cost of deduction
10000 X (1 - .30) = 7000
10000 expenditure costs me 7000 bc I pay 10,000 and save 3000 in taxes
After-tax cost of deduction
- -receive 10,000 of income (donate 10,000) (deductible charitable contribution)
- -marginal tax rate is 30%
- -what is my after tax cost of deduction
10000 X (1 - .30) = 7000
10000 expenditure costs me 7000 bc I pay 10,000 and save 3000 in taxes
Picking stocks
can we as individual investors in ACC 200 use our skills learned her to identify winning and losing stocks - NO! market is fast and efficient
Sure-fire investment advice
- -diversity - don’t put everything into one stock
- -buy and hold for the long term (20-30yrs)
- -RUN from guaranteed high returns
two types of mutual funds!
MANAGED FUNDS
- -professional chooses stocks
- -usually frequent changes in stocks
- -attempt to out-guess - “time” market
INDEX FUNDS
- -stocks chosen by math rule
- -few changes in stocks - diversify
- -buy and hold strategy
Income tax planning - three basic strategies
- shift income from one TIME PERIOD to another
- -time value of $ - shift income from ONE POCKET to another
- -gift - keep control of income but shift to another person - ex. of sport moving to state with lower taxes - change the CHARACTER of income (or rate at which income will be taxed)
- -short term favorable rate
Retirement savings plans
TRADITIONAL IRA
- -time value of money benefit
- -limit on contributions
- -no taxes now, taxes later
TRADITIONAL 401(k)
- -by employer
- -limit on contributions
- -no taxes now but later
- -employer matches contributions to same extent
both traditional methods save taxes when going in but costs taxes when going out
ROTH IRA
- -limit on contributions
- -pay taxes now, no taxes later (including interest)
- -put income in and doesn’t reduce taxes, but no cost coming out - saves you from increasing tax rates
tax avoidance vs. evasion
Tax AVOIDANCE is legal
Tax EVASION is illegal
Goal of planning NOT to minimize taxes but to MAXIMIZE PROFITS
If you expect tax rates to increase, which is more attractive from taxing perspective?
ROTH IRA
–contribute bc marginal tax rate is low
INV.
Raw materials inv.
WIP inv.
finished goods inv.
WIP INV. always has 3!
- -direct materials
- -direct labor
- -overhead
Overhead
- -indirect material
- -indirect labor
- -others: rent, electricity, depreciation
INV.
Raw materials inv.
WIP inv.
finished goods inv.
WIP INV. always has 3!
- -direct materials
- -direct labor
- -overhead
Overhead
- -indirect material
- -indirect labor
- -others: rent, electricity, depreciation
where would payment of a factory electricity bill be shown?
manufacturing overhead
where would payment of advertising be shown?
period cost
can solve for labor hours in WIP inv. bc
it is always 3 in the ledger - DM, DL, OV
–leftover one is laborers if they give the other two
What is total cost of goods sold
Cost sold was 673,000
–but OVER APPLIED overhead - took too much overhead out
673,000 - 16,000 (overhead) = 657,000 cost of goods sold!!
what determines a reasonable price
the market
fair price cost plus $50 order
–fair price is the cost + $50
to apply predetermined overhead rate
use our estimated amount times the ACTUAL labor hours = how much to apply
to apply predetermined overhead rate
use our estimated amount times the ACTUAL labor hours = how much to apply
Friend has invested 300,000 in business - what should be the selling price to make profit?
income taxes is 40% (taken by multiplying balance after rev - all costs (operating income)
invested 300,000 (x .01) - means 3000 profit to be worth it, otherwise would make more investing it in a bank - opportunity cost of having $ in the business)
operating income = x
x - .4x = 3000
.6x = 3000
x = 5000 - should be the operating income - then work up from there by adding the expenses to determine the cost
–find rev. should be 24,000
–(24,000 / 40 units) = $600 should be selling price to make 3000 each month!
Friend has part-time employees who work 200 hours per month. Friend works herself in business 60 hours per week. What should be selling price to make business worth it?
need to make 8000 or time should be spent elsewhere
x - .4x = 8000
.6x = 8000
x = 13,333 (income before income taxes = operating income)
13,333 + 19,000 (expenses) = 32,333 revenue
32,333 / 40 units = $808 selling price
Friend has part-time employees who work 200 hours per month. Friend works herself in business 60 hours per week. What should be selling price to make business worth it?
need to make 8000 or time should be spent elsewhere
x - .4x = 8000
.6x = 8000
x = 13,333 (income before income taxes = operating income)
13,333 + 19,000 (expenses) = 32,333 revenue
32,333 / 40 units = $808 selling price
Design change would make extra overhead cost (boeing example)
design change would increase labor costs unrelated to the amount of direct labor (engineering - indirect labor so increase labor cost) - so more allocated to product
overhead cost is allocated based on direct labor hours
must use 2 accounts - otherwise every plane gets the increased costs bc budgeted # and would be allocated, making the regular planes overpriced
- –use manufacturing overhead
- -customized overhead - driver is # design changes or # hours engineer spend
Design change would make extra overhead cost (boeing example)
design change would increase labor costs unrelated to the amount of direct labor (engineering - indirect labor so increase labor cost) - so more allocated to product
overhead cost is allocated based on direct labor hours
must use 2 accounts - otherwise every plane gets the increased costs bc budgeted # and would be allocated, making the regular planes overpriced
- –use manufacturing overhead
- -customized overhead - driver is # design changes or # hours engineer spend
charity auction example
Prize for charity is new car costing 18,000
–caterer charged $40 per person for banquet and charity sold tickets for $250 each
how many people had to attend banquet for charity to break-even?
250x - 40x - 18000 = 0
x = 86 tickets!
do you think charity performed break-even analysis?
most people don’t do it!!
Jobs bank GM
Is direct labor a fixed or variable cost?
–almost always a VC (salary = FC, hourly = VC)
Jobs bank changed them from a VC to a FC
lost money and became expensive for GM in 2007 - when sales drop you can decrease VC but they and changed costs to FC so had to pay regardless
—always good to minimize amount of FIXED COSTS
Financial security (2 tips)
- spend less than you make
2. keep fixed costs low
Income stmt btwn financial and management
Financial
- –cost of goods sold is the total product costs from DM, DL, and MO
- -sales less cost of goods = gross profit then operating expenses then operating income
- -operating expenses (depr. rent, utility, wage) are the period costs
mgmt.
- -sales less VC is contributed margin
- -CM less fixed costs gives operating income
- -VC or FC could be either product or period costs
FOR BOTH
after operating income is interest expense and tax expense and then net income
contributed margin in CVP analysis
(SR - VC)
contributed margin is - what contributes to cover fixed costs - then becomes profit
found by (CM per unit X # units) OR (SP per unit X CM ratio)
SHORTCUT
(Fixed costs) / (CM per unit)
to find breakeven # passengers per flight for 2 airlines
revenue per passenger = rev / # passengers
VC per passenger = VC / # passengers
CM per passenger = rev / (# pass - VC/# pass)
CM percentage
contributed margin in CVP analysis
(SR - VC)
contributed margin is - what contributes to cover fixed costs - then becomes profit
found by (CM per unit X # units) OR (SP per unit X CM ratio)
SHORTCUT for breakeven!
(Fixed costs) / (CM per unit)
to find breakeven # passengers per flight for 2 airlines
revenue per passenger = rev / # passengers
VC per passenger = VC / # passengers
CM per passenger = rev / (# pass - VC/# pass)
CM percentage = (CM/#) / (rev/#)
FC per flight = FC/#flights
to find breakeven # passengers take
FC/flight / CM/pass
= 119 for first flight
find percentage of seats that must be purchased for the airline to breakeven
breakeven # seats / total # seats
airline 1 = 119 / 163 = 73%
“breakeven passenger load factor”
if this # is high then it means FC are high!!!
–to make money they must sell more than 73% of seats
McDonald’s example
What is CM ratio? (total sales rev. then i subtracted all the VC) - then divide by sales rev.
7686 / 16,233 = 47.3%
average sale per customer to visit mcdonalds is $3.28 - what is contributed margin per visit?
(3.28 X 47%) = $1.55
6,399 company owned stores what is FC per store per year = $705,110.10 (Add fixed costs and divide by # stores)
each store is open 16 hours per day, 365 days a year - what is fixed cost per store per hour
705,110/365/16 = $120.74 FC per store per hour
how many customers must visit average McDonalds PER HOUR to break-even?
120.74 / 1.55 = 78 customers (FC/hr. / CM/visit)
McDonald’s example
What is CM ratio? (total sales rev. then i subtracted all the VC) - then divide by sales rev.
7686 / 16,233 = 47.3%
average sale per customer to visit mcdonalds is $3.28 - what is contributed margin per visit?
(3.28 X 47%) = $1.55
6,399 company owned stores what is FC per store per year = $705,110.10 (Add fixed costs and divide by # stores)
each store is open 16 hours per day, 365 days a year - what is fixed cost per store per hour
705,110/365/16 = $120.74 FC per store per hour
how many customers must visit average McDonalds PER HOUR to break-even?
120.74 / 1.55 = 78 customers (FC/hr. / CM/visit)
Best way to prove reliable to bankers is through proof of..
PAST TRANSACTIONS
-bankers wants to know who put the # in and how - look at past performance and accuracy of budget compared to acctual
Covey’s budgeting thing
urgent not
important I II
not imp. III IV
II - ppl put budgeting here to put it off - as important but not urgent
Cash budget example
beg. cash balance
budgeted cash collections
cash available
budgeted cash payments
–exp./ dividends/ purchases
total budgeted cash payments
preliminary budgeted cash balance
borrowing
loan payment
ending cash balance
5 basics of family finances
- avoid debt
- budget **
- build a reserve (fin. and food storage)
- pay tithing (first obligation - 10% of our best by putting it first) **
- teach family members (be responsible for our expenses) **
2 essentials on budgeting
- plan
2. writing things down
tips on budgeting
- tithing first
- always budget for entertainment
- always budget for allowance
Advice about financial planning
- spend less than you make
- keep fixed costs low
- teach your children
Alma’s advice - do not be slothful bc of the EASINESS of the way
Advice about financial planning
- spend less than you make
- keep fixed costs low
- teach your children
Alma’s advice - do not be slothful bc of the EASINESS of the way
mission statement
philosophy/belief of company - purpose/vision
-how do we improve ourselves and customers by being in business
“we will be..”
strategic decisions
how do you MEASURE progress in achieving goals in the mission statement
“we will do..”
4 Categories of measurements for a balanced scorecard
- financial
- customer
- internal process
- –creation and production of products
- –R &D - repair cycle time - learning and growth
Personal balanced scorecard - quantitative measures
- physical/nutritional
- financial
- spiritual
- social
- educational
Personal balanced scorecard - quantitative measures
- physical/nutritional
- financial
- spiritual
- social
- educational
T/F you get EXACTLY what you measure!
TRUE
-so be careful what you measure!
what do you want to become?
–how do you spend your time and money right now?
