Lecture 1

Question 1

The science of accounting

Answer 1

Accounting is the science of measuring, reporting and controlling performance

Question 2

Financial accounting

Answer 2

External reporting (e.g. investors, creditors, SEC, ESMA)
Defined by GAAP/IFRS
Only focus is financial performance

Question 3

Management accounting

Answer 3

Internal reporting (e.g. compensation, production decisions, pricing and forecasting
Defined by management
Financial and non-financial performance

Question 4

Cost accounting

Answer 4

One piece of management accounting
Costs of acquiring or using resources in an organization
Often used synonymously with management accounting, but its really just a subset of management accounting

Question 5

Why management accounting works

Answer 5

Rolls into external financing reporting (for most firms, COGS is the single largest expense)

Question 6

Important roles outside of financial accounting

Answer 6

1. Decision-facilitating: Information improves decisions
2. Decision-inlfluencing: Motivate employees to work hard, prevent and detect unethical behavior
3. Coordination-facilitating: Coordinate decisions across units (e.g. sales lets production know how many units to make)

Question 7

What management accoutning used to be

Answer 7

Bookkeeping
Historical costs to create financial statements

Question 8

Modern management accounting (strategic management accounting)

Answer 8

Future-oriented
Improving decision-making
Problem-solving
Adding value

Question 9

Cost terms

Answer 9

You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business (warren buffet

Question 10

Cost

Answer 10

A sacrifice in order to achieve a specific purpose

Question 11

Expense

Answer 11

Reducting in wealth; hits the income statement

Question 12

Opportunity cost

Answer 12

the road not taken”
The options you gave up when you made a decision
When you go to a party, the opportunity cost is studying for this class

Question 13

Cost object

Answer 13

Something were trying to figure out the cost of. Something that “accumulates costs”

Question 14

Variable cost

Answer 14

A cost that increases when you make one additional item
Total variable costs increase when production increases
E.g. Materials, electricity or hourly wages

Question 15

Fixed cost

Answer 15

A cost that does not increase when you make one additional item
Total fixed costs remain the same when production increases
E.g. Rent or salaries

Question 16

Average cost

Answer 16

How much the average unit costs. Found by adding up all costs and dividing by the number of units produced

Question 17

Marginal cost

Answer 17

Is what it costs to make one more unit
Calculated as the change in total costs if you make one extra unit

Question 18

Cost driver

Answer 18

A variable, such as the level of activity or volume, that causes costs to change
E.g. number of hours worked causes total wages to change

Question 19

Relevant range

Answer 19

The brand or range of normal activity (or volume) in which there is a specific relationship between the level of activity (or volume) and the cost in question
E.g. Once employees go over 40 hours in a week, then we have to pay overtime

Question 20

Direct costs

Answer 20

Can be t raced directly to a cost object
e.g. Wood when making a bookshelf

Question 21

Indirect costs

Answer 21

Are not traced to a cost object, often because it is not economically or technologically feasible
E.g. Glue, electricity or sandpaper

Question 22

Factors affecting direct/indirect costs classification

Answer 22

Materiality of the cost in question
Availability of information-gathering technology
Design of operation
Note: A specific cost may be both a direct cost of one cost object and an indirect cost of another cost object
A mass-produced bookshelf may have screws be a direct costs
(We know exactly how many screws go where)
A custom build bookshelf may have screws be an indict cost
(not worth our time to count them as we go)

Question 23

How to know if a product was direct or indirect

Answer 23

If we know which product was used: direct

If we do not know which product it was used for: indirect

Do we know which product it was used for?
Yes: direct
No: indirect

Question 24

How to know if a cost is variable or fixed

Answer 24

Does the cost increase with more production:
Yes: variable
No: fixed

Question 25

Categorization

Answer 25

Dell computers make custom order computers equipment. Classify each cost as a direct/indirect and variable/fixed

Question 26

Inventoriable costs (aka product costs)

Answer 26

Costs used in the manufacturing of a product. These costs stay on the balance sheet as assets (i.e. they are capitalized) until they are sold. Then they hit COGS as an expense

Question 27

Period costs

Answer 27

SG&A costs that generally don’t hit the balance sheet
E.g. sales commissions, CEO salary, advertising costs, etc.
Expenses as incurred
Important for decision-making, but not our main focus since they are not part of COGS

Question 28

Direct material (inventory costs)

Answer 28

Raw materials that will be turned into finished goods; can be traced to individual jobs

Question 29

Direct labor (inventory costs)

Answer 29

Labor costs that can be traced to individual jobs

Question 30

Manufacturing overhead (inventory costs)

Answer 30

All other manufacturing costs: all costs that are indirect and/or fixed

Question 31

Prime costs

Answer 31

DM + DL (everything but MOH; also called “direct costs”)
DM = Direct material
DL = direct labor

Question 32

Conversion costs

Answer 32

DL + MOH (everything but DM; cost of turning DM into finished goods)
DL = Direct Labor
MOH = Manufacturing overhead

Question 33

Service companies (types of inventory)

Answer 33

No inventory

Question 34

Merchandising companies (types of inventory)

Answer 34

Merchandising companies (merchandise inventory (purchased inventory))

Question 35

Manufacturing companies (types of inventories)

Answer 35

Raw materials (RM) sometimes called “direct materials” (DM)
Resources in stock and available for sue
Work-in-process (or progress, WIP)
Products started but not yet completed
Finished goods (FG)
Products completed and ready for sale

Question 36

Calculating costs of merchandising company

Answer 36

Calculating costs is easy!
What we paid for stuff, plus a few extras (E.g. Shipping and insurance to get the stuff)

Question 37

Calculating costs of manufacturing company

Answer 37

Calculating costs is hard!
We buy raw materials, and work to turn those raw materials into finished goods
We have overhead (e.g. factory rent)
The cost of the inventory includes all of those costs added up!