lecture 2 Flashcards
Difference between Financial and management Accounting
Financial accounting information is primarily used by external stakeholders like investors and government agencies to assess a company’s financial health and compliance with regulations. Management accounting information, on the other hand, is used internally by managers and decision-makers within the organisation.
High low method
slope = rise(cost)/run(units)
Inventoriable Costs (aka Product Costs)
Costs used in the manufacturing of a product. These costs stay on the balance sheet as assets (i.e., they are capitalised) until they are sold. Then they are moved to COGS (Cost of goods sold) as an expense.
Period Costs -
All costs (e.g. SG&A costs) other than COGS. These generally don’t hit the balance sheet. E.g., sales commissions, CEO salary, advertising costs, etc.
Expensed as incurred in the income statement (after gross margin).
While important for decision-making, but not our main focus since they are not part of COGS.
Direct Material (DM)
Direct Labour (DL)
Manufacturing Overhead (MOH)
– Raw materials that will be turned into finished goods; can be traced to individual jobs
– Labour costs that can be traced to individual jobs
– All other manufacturing (inventoriable) costs that are indirect
Sometimes split into variable (VOH) and fixed (FOH)
Prime Costs =
DM + DL (everything but MOH; also called “Direct Costs”)
Types of Inventories;
Merchandising Companies:
- Merchandise Inventory (Purchased Inventory that is finished goods).
Manufacturing Companies:
- Raw Materials (RM)—sometimes called “Direct Materials” (DM)
(resources in stock and available for use.)
- Work-in-Process (or progress, WIP).
(products started but not yet completed. )
- Finished Goods (FG)
(products completed and ready for sale. )
Decentralisation:
can improve decision-making by giving authority to the people who understand the situation.
Responsibility Center :
Organisational unit directed by a single party (individual or committee) that is evaluated based on its own set of managerial reports.
The 4 types of responsibility centres:
Cost — accountable for costs only
E.g., Production, IT, HR
Revenue — accountable for revenues only
E.g., Sales
Profit — accountable for revenues and costs
E.g., A combined production and sales department
Investment — accountable for investments, revenues, and costs
E.g., A whole company division
which responsibility centres is better
Profit and Investment
Bloomfield’s Law of Measure Management :
Measure management arises when incentivized measures capture performance constructs with error, the people being evaluated know the details of how performance is measured, and people have discretion to distort either operations or reporting.”
Good performance methods have
Goal Congruence/Alignment: the measure encourages your employees to do what you want them to do.
Controllability: Employees are held accountable for things within their own control.
4 types of Estimating costs
Industrial Engineering (aka, work-measurement method)
Conference method
Ask experts for the cost function
Account analysis method
Use accounting theory to classify costs
Quantitative analysis (e.g., High-Low, Regression)
Data-driven, mathematical; only works within a relevant range
CVP : Cost, Volume and Profit
formula
(p-v)Q = π + F
- C = Total Cost
- F = Fixed Cost
- v = Variable Cost per Unit (aka marginal cost)
- Q = Quantity of Units Produced
- R = Total Revenue
- p = Selling Price per Unit
- π = Operating Profit (before taxes)
Contribution Margin Per Unit (CM/U)
P-v
Total Contribution Margin
(p-v)Q
Breakeven: (when π = 0) [Often denoted as Q_BE]
(p-v)Q=F.
(then get Q on one side)
Target Units Q* (CVP) formula
Q =(π + F)/(P-v)
Operating income
net income/1-Tax rate
Margin of Safety (MOS)
= Budgeted Sales - QBE
Trade off point theory
formula (to find the point of indifference)
Q = f2-f1/v2-v1
Manufacturing Overhead (MOH) definition
All other manufacturing (inventoriable) costs that are indirect
Sometimes split into variable (VOH) and fixed (FOH)
3 types of way to allocate cost
Actual Costing:
Normal Costing:
True costing (standard costing):
DLH
Total cost/(DLh1+dlh2…+dlhn)
Actual Costing:
formula
Actual OH(cost)/Actual Base (total DLH) * Actual Particular DLH base used for the job
Normal costing
estimated OH(cost)/estimated Base (total DLH) * Actual Particular DLH base used for the job
True costing (standard costing)
estimated OH(cost)/estimated Base (total DLH) * estimated Particular DLH base used for the job
Underallocated (aka Underapplied) Overhead
actual costs > allocated costs
Overallocated (aka Overapplied) Overhead
actual costs < allocated costs
What to do when there is a difference
between the actual sum and what was gotten with the allocating cost methos (hint : there are 3 ways)
Adjusted Allocation Rate Approach
Proration Approach
Write-Off Approach
Net profit margin vs Gross profit margin
NetProfitMargin=(NetProfit(income)/Revenue)×100
GrossProfitMargin=(GrossProfit/Revenue)×100
btw Gross Profit = Revenue - Cost of Goods Sold (COGS)
Net Profit = Revenue - Total Expenses (including operating expenses, interest, taxes, etc.)
Tax Paid and %
Tax Paid = Pretax Profit - Net Income
Tax Percentage = (Tax Paid / Pretax Profit) * 100
