Final Exam Review Flashcards
Managerial accounting is the process of:
Identifying Measuring Analyzing Interpreting Communicating information throughout an organization
Four organized set of activities of the management team:
Directing activities
Decision making
Planning
Controlling
How Managerial Accounting Adds Value to the Organization
- Providing info for decision making and planning.
- Assisting managers in directing and controlling activities.
- Motivating managers and other employees towards organization’s goals.
- Measuring performance of subunits, activities, managers, and other employees.
- Assessing the organization’s competitive position.
Controller
The chief managerial and financial accountant
Controller’s Responsibilities
Supervising accounting personnel.
Preparation of information and reports, managerial and financial.
Analysis of accounting information.
Planning and decision making.
Treasurer’s Responsibilities
Responsible for raising capital and safeguarding the organization’s assets.
Supervises relationships with financial institutions.
Work with investors and potential investors.
Manages investments.
Establishes credit policies.
Manages insurance coverage.
Theoretical Capacity
Upper limit on the amount of goods or services if everything works perfectly.
Practical capacity
allows for normal occurrences such as cash register downtime and cashier fatigue or illness.
Managers need cost information to perform each of these functions:
Strategy formulation Planning Control Decision Making Directing
An important first step in managerial accounting is to gain an understanding of the various types of _____ incurred by an organization.
Costs
Cost
Measure of resources given up to achieve a particular purpose.
Associated with goods for sale until the time period during which the products are sold.
Product costs
Costs that are expensed during the time period in which they are incurred.
Period costs
Expenses are..
the consumption of assets for the purpose of generating revenue.
Product Costs
COGS or operating expenses?
COGS
Period Costs
COGS or operating expenses?
Operating expenses
Manufacturing Costs
Direct Material
Direct Labor
Manufacturing Overhead
Materials used to support the production process
Indirect material
Cost of personnel who do not work on the product.
Indirect labor
Other MOH costs:
depreciation, property taxes, insurance, etc
Manufacturing Overhead
Indirect Material
Indirect Labor
Other
Prime Cost
combination of direct materials and direct labor
Conversion Cost
combination of direct labor and manufacturing overhead
Cost behavior
How a cost will react to changes in level of business activity
Total Variable Costs
change in direct proportion to a change in the level of activity
Total Fixed Costs
Remain unchanged when activity changes
Activity
refers to a measure of the organizations output of products or services
Costs that can be easily and conveniently traced to a product or department
Direct costs
Costs that must be allocated in order to be assigned to a product or department
Indirect Costs
Opportunity Cost
Potential benefit that is given up when on alternative is selected over another
Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. SHOULD NOT BE CONSIDERED IN DECISIONS
Differential Costs
Costs that differ between alternatives
Extra cost incurred to produce one additional unit
Marginal Costs
Total cost to produce a quantity divided by the quantity produced.
Average Costs
Relationship between cost and activity is called:
cost behavior
Step-variable costs
total cost remains constant within a narrow range of activity and the total cost increases to a new higher cost for the next higher range of activity
Step-fixed costs
Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity
Semivariable Cost
Partly fixed and partly variable
Curvilinear Cost
A straight-line closely approximates a curvilinear line within a relevant range
Committed Costs
Long-term, cannot be reduced in the short term.
Discretionary costs
May be altered in the short term by current managerial decision
Engineered Costs
Physical relationship with activity measure.
Cost Estimation Methods
Account-classification
Visual-fit
High-low
Least-Squares Regression
Visual-Fit Method
A scatter diagram of past cost behavior may be helpful in analyzing mixed costs
The High-Low Method
Used the highest and lowest levels of activity to compute the variable cost per unit and the total fixed cost.
Account-Classification Method
Cost estimates are based on a review of each account making up the total cost being analyzed.
Least-Squares Regression Method
Regression is a statistical procedure used to determine the relationship between variables such as activity and cost.
Learning Curve Effect
A concept that describes how new skills or knowledge can be quickly acquired initially, but subsequent learning becomes much slower
Data Collection Problems
- Missing data
- Outlier data points
- Mismatched time period costs
- Trade-offs in choosing the time period
- Allocated and discretionary costs
- Inflation
Contribution Margin
Total revenue minus total variable costs (amount of revenue left to cover fixed expenses and profit after paying variable expenses)
Unit Contribution Margin
Unit sales price less unit variable costs
Break-Even Point
Point in the volume of activity where the organization’s revenues and expenses are equal
Break-even Point (in units) Formula
= Fixed Expenses/Unit Contribution Margin
Break-even Point (in dollars) Formula
=Fixed Expenses/CM Ratio
CM Ratio
=Contribution Margin/Sales
Formula for Units sold to earn the target profit
(Fixed expenses + Target profit)/Unit Contribution Margin
Before-tax net income formula
=Target after-tax net income/(1 - tax rate)
Safety Margin
The difference between budgeted sales revenue and break-even sales revenue
aka
the amount by which sales can drop before losses occur
Sales mix
The relative combination in which a company’s products are sold
Assumptions Underlying CVP Analysis
- Selling price is constant throughout the entire relevant range.
- Costs are linear over the relevant range.
- In multi-product companies, the sales mix is constant.
- In manufacturing firms, inventories do not change (units produced = units sold).
Decision-Making Process
- Clarify the decision problem
- Specify the criterion
- Identify the alternatives
- Develop a decision model
- Collect the data
- Make a decision
Data must be:
Relevant
Accurate
Timely
Relevant
Pertinent to a decision problem
Accurate
Information must be precise
Timely
Available in time for a decision
Information is relevant to a decision problem when…
- It has a bearing on the future
2. It differs among competing alternatives
Avoidable costs
Expenses that will no longer be incurred if a particular action is taken
Unavoidable
Expenses that will continue to be incurred even if an activity is eliminated
With excess capacity relevant costs will usually be the the _______ costs (and benefits) associated with the special order.
Variable
Without excess capacity relevant costs will usually be the variable costs associated with the special order but the _________ _______ of using the firm’s facilities for the special order are also relevant
Opportunity cost
Outsource a Product or Service
A decision concerning whether an item should be produced internally or purchased from an outside supplier is often called a “make or buy” decision.
Add or Drop
One of the most important decisions managers make is whether to add or drop a product service or department
Used for production of large, unique, high-cost items
Job-Order Costing
Two Types of Job-Order Costing
Job-shop operations - products manufactured in very low volumes or one at a time
Batch-production operations - multiple products in batches of relatively small quantity
Used for production of small, identical, low cost items
Process Costing
Mass produced in automated continuous production process
Process Costing
Costs can be directly traced to each unit of product
Job-Order Costing
Costs cannot be directly traced to each unit of product
Process Costing
Job-cost record
Primary document for tracking the costs associated with a given job
Form used to authorize the use of materials on a job
Materials Requisition form
Accumulate direct labor costs by means of a work record
Time Ticket
Apply manufacturing overhead to jobs using a:
Predetermined overhead rate
Actual Costing
Actual direct material and direct labor combined with actual overhead.
Normal Costing
Actual direct material and direct labor combined with predetermined overhead
Benefit of using a predetermined overhead rate?
Estimate total job costs sooner because the actual rate isn’t known until the end of the period
Applied Overhead =
POHR * Actual amount of allocation base
