Managerial Accounting Concepts 2.1 &2.2 Flashcards
What are the 6 Branches of Accounting?
•Financial Accounting—historical in nature
- Cost Accounting—help operations control operations
- Managerial Accounting—provide information for management decisions
- Tax Accounting—preparation of filing tax forms and planning to minimize tax payments
- Auditing—reviewing and evaluating documents, records and systems
- Accounting Systems—review information systems for the organization
Whats the difference beween Financial & Managerial Accounting?
- Financial Accounting is Historical
- Managerial Accounting provides information, enhances controls, and plans for events
What is Fixed Costs?
•Fixed Costs - Costs that are normally not affected by the changes in Sales Volume over a relevant range
What is Relevant Range?
Relevant Range - Range of activity under which cost data is valid
What is Variable Costs?
Variable Costs - Costs that are constant on a per unit basis
What is Mixed Costs?
Mixed Costs - Also called Semi-Fixed or Semi-Variable Costs and have a Fixed and a Variable Component
What is Controllable Costs?
Controllable Costs - Costs that can be changed in the short term and are under the control of an Operating Manager
What is Noncontrollable Costs?
Noncontrollable Costs - Costs that normally cannot be changed in the short run
What is Prime Costs?
Prime Costs - Material plus Labor
What is Unit Cost?
Unit Cost - Cost per Saleable Unit
What is Avoidable Costs?
Avoidable Costs - Fixed Costs that are eliminated during a shutdown
What is Capacity Fixed Costs?
Capacity Fixed Costs - Costs incurred when providing goods & services
What is Discretionary Fixed Costs?
Discretionary Fixed Costs - Costs that management can avoid
What is Step Costs?
Step Costs - Costs that change due to the changes in a range of activity
What are Overhead Costs?
Overhead Costs - All costs other than direct costs incurred by profit centers (Indirect Costs)
What are Differential Costs?
Differential Costs - Costs that differ between two alternatives
What are Sunk Cost?
Sunk Cost - A past cost relating to a past decision
What are Average Cost?
Average Cost - Cost to produce an Item (Include All Costs)
What are Incremental Costs?
Incremental Costs - How much does it costs to produce another unit (Variable Costs Only)
What are Standard Costs?
Standard Costs - What costs should be under ideal situations
What is Indifference Point?
Indifference Point - The level of activity where costs are the same under variable & fixed arrangements
For purposes of decision-making costs are categorized into what two basic types?
- Variable
- Fixed
What are examples of Variable Costs?
Variable Costs:
- Costs that change proportionally with the volume of the business
- Variable costs per unit remain constant
- Examples:
- Food Cost
- Hourly Wages
- Travel Agent Commissions
- Examples:
What are examples of Step Costs?
Step Costs:
- Constant within a range of activities
- But different among ranges of activity
What are examples of Fixed Costs?
Fixed Costs:
- Remain constant in the short run even when sales volume varies
- In the long run they can change
- Fixed cost per unit goes down as unit sales go up
- Examples
- Salaries
- Rent Expense
- Insurance
- Property Taxes
- Depreciation Expense
- Examples
What are “Other Fixed Costs”?
Avoidable Fixed Costs
Unavoidable Fixed Costs
Semi-variable Costs (Mixed)
What are Avoidable Fixed Costs?
Avoidable Fixed Costs
- Do not affect the ability to provide goods and services
- They are not required
- Example: If there is a fixed advertising campaign of $5,000 per month, the company can stop the advertising and still stay in business; although sales volumes may suffer
What are Unavoidable Fixed Costs?
Unavoidable Fixed Costs
- Costs that must be incurred if business is to continue
- Example: The monthly lease for the restaurant space is $25,000 a month. The lease expense is an unavoidable fixed costs, if not incurred then there is no restaurant and therefore the business would need to close
What are Semi-variable Costs (Mixed)?
Semi-variable Costs (Mixed)
- Have both a variable and fixed component
- Example: A commercial lease may have fixed rent per month plus an additional rent based on sales
- Rent for a doughnut shop may be $5,000 per month fixed and 10% of total revenue. The $5,000 is fixed and the 10% portion is variable
Whats the formula for Total Costs?
Total Costs
Variable
+ Step Costs
+ Fixed Costs
+ Mixed Costs
= Total Costs
What are the 3 Methods of determining Mixed Cost Elements?
High - Low (Two Point Method)
Scattergram
Regression analysis
How to Solve using High-Low(Two Point Method)?
High - Low (Two Point Method)
- Select a sample high and low month for Sales (or Costs)
- Calculate difference in two measures (Sales or Costs and Activity)
- Divide activity difference into Sales or Cost Difference
- Result Is Variable Cost Per Unit
- Solve for Fixed Costs
How to solve using Scattergram?
Scattergram
- Graph Sales (Cost) Data with activity
- Draw best straight line through data
- Where intersects Y Axis Is Fixed Costs
- Solve for Variable Cost Per Unit
How to solve using Regression Analysis Method?
Regression Analysis Method of Least Squares
- Computation of Best Straight Line
- Y = a + bx
- b = Slope of Line or Variable Cost Per Unit
- A = Y Intercept or Fixed Cost
Sample of Scatter Graph
Sample of Position Correlation
Sample of Negative Correlation
What is Indifference Point?
Indifference Point
- Decision to select fixed or variable cost arrangement is based on cost-benefit considerations involved
- Indifference point is the sales (revenue) level at which the period cost is the same under either arrangement
Solve for Indifference Point
Fixed lease cost = $40,000; Variable lease cost = 2% of sales (revenue)
Indifference point (X) : $40,000 = 0.02X
X = $2,000,000
Indifference Point Expanded Problem:
- Fixed lease cost = $40,000
- Variable lease cost = 2% of revenue
- Expected annual revenue is $3,000,000
- Indifference point = $2,000,000
Which is better? Fixed or Leased option?
The variable lease cost will be 2%×3,000,000= $60,000
Since the fixed lease arrangement will cost $20,000 less than the variable lease arrangement, you would select the Fixed lease option
Types of Cost Allocation
Cost Allocation
- Distribution of Overhead Costs to the Profit Centers
- Single Allocation Base Approach - Uses a single factor such as Square Footage, Number of People, Revenue
- Multiple Allocation Approach - Use the most closely related factor
Explain Horizontal Analysis
Horizontal Analysis
- Compares two periods
- Need comparative balance sheet
- Simplest approach
- Shows the absolute change in dollars between two periods
- Shows percentage change
Explain Vertical Analysis
Vertical Analysis
- Often referred to as common size analysis
- Calculating the % of individual assets to total assets
- When completed the total assets would equal 100%
- Same is done for liabilities and equity accounts, combined liabilities and equity total should be 100%
Explain Ratio Analysis
Compare Against Something
- Prior Period
- Industry Standard
- Budget
- Ratio Analysis
Express in a Number of Ways
- Percentage
- Per Unit Basis
- Turnover
- Coverage
2.2 Analytics has what 4 types of analysis?
- Horizontal analysis
- Vertical analysis
- Ratios analysis
- Variance analysis
What are the 5 classes of Ratios?
Classes of Ratios
Liquidity - Ability to Meet Short Term Obligations (CAAAOW)
- Current Ratio—measures short term cash needs CA/CL
- Acid Test Ratio (Quick Ratio)—measures short term cash needs more vigorously
- A/R Turnover—measures efficiency of collection and credit policies
- Average Collection Period—gauges liquidity of Accounts Receivable
- Operating Cash Flows to Current Liabilities
- Working Capital Turnover
Solvency - Extent to Which the Enterprise Has Been Financed
Activity (Turnover) - Ability to Use the Property’s Assets
Profitability - Measurement of Management’s Overall Effectiveness
Operating - Analysis of Hospitality Establishment Operations
What is the formula for Current Ratio?
Current Ratio: Measures ability to meet short-term cash needs
Formula: Current Assets / Current Liabilities
Expressed as a coverage of so many times
- A current ratio of 1.58 for example would indicated that for $1 in current liabilities you will have $1.58 in current assets to cover that. You are “over” covered by .58
What is the Acid Test Formula?
Acid Test Ratio (Quick Ratio): Measures ability to meet short-term cash needs more rigorously
Formula
(Cash, Short-Term Investments, Notes Receivable & Accounts Receivable)/Current Liabilities
Expressed as a coverage of so many times
- An Acid Test Ratio of 1.44 would indicate that for $1 of current liabilities there are “quick” assets of $1.44
Whats Accounts Receivables Turnover Formula?
Accounts Receivable Turnover: Measure of efficiency of firm’s collection and credit policies
Formula
Total Revenue / Average Accounts Receivable (Beg + End A/R) / 2
Recorded as a turnover
- A/R Turnover of 11.76 times indicates that on average the company’s accounts receivable turned over 11.76 times during the year
What is Average Collection Period?
Average Collection Period:Helps gauge liquidity of accounts receivable (ability to collect cash from customers)
Formula
Number of Days in Year/ AR Turnover
Expressed in days
- An average collection period of 31 days means that, on an average, the business was collecting on all its Accounts Receivables every 31 days
Whats Solvency Ratio?
Measures the extent of a firm’s financing with debt relative to equity and its ability to cover interest and other fixed charges in the long term
Examples:
- Solvency Ratio—measures the coverage of assets over liabilities
- Debt to Equity Ratio—measures the extent the company’s financing is with debt
What are the 5 Solvency Ratios? (FOLND)
Solvency- Total Assets to Total Liabilities and Total Liabilities to Total Assets
- Debt-Equity
- Long Term Debt to Total Capitalization
- Number of Times Interest Earned
- Fixed Charge Coverage
- Operating Cash Flows to Total Liabilities
What is Solvency
Solvency- Total Assets to Total Liabilities and Total Liabilities to Total Assets
- Debt-Equity
- Long Term Debt to Total Capitalization
- Number of Times Interest Earned
- Fixed Charge Coverage
- Operating Cash Flows to Total Liabilities
Example
Total Assets = 1,176,300
Total Liabilities = 659,000
1,176,300/659,000= 1.79 times
What is Debt to Equity Ratio?
Debt-Equity Ratio: Measures the extent of financing with debt
Formula
Total Liabilities/ Total Owner’s Equity
Reflected as a coverage ratio
Compares debt to the net worth or Owner’s Equity
- A debt to equity ratio of 1.27 would indicate that for every $1 of equity the business owes creditors $1.27
Example
Total Liabilities = 659,000
Total Owner’s Equity = 517,300
659,000/517,300 = 1.27 to 1
- If the ratio is greater than 1, the majority of assets are financed through debt. If less than 1, then assets are mostly financed through equity
What is Activity Ratios?
Ratios that measure the efficiency of various operations of a business.
These ratios measure the efficiency of the firm in using its resources/assets and are sometimes referred to as Asset Management Ratios
Examples:
- Inventory Turnover
- Working Capital Turnover
- Property and Equipment Turnover
- Asset Turnover
- Paid Occupancy Percentage
- Complimentary Occupancy
- Average Occupancy Per Room
- Multiple Occupancy
Sample of Activity Ratio: Asset Turnover
Asset Turnover Ratio:Assesses effectiveness in generating revenue from investment in total assets
Formula
Total Revenues/Average Total Assets
Reflected as a turnover ratio
- An Asset Turnover Ratio of 1.21 times indicates that each dollar of assets generated $1.21 dollars in revenue
Sample of Paid Occupancy Percentage
Paid Occupancy Percentage:Measures success in selling its product
Paid Rooms Occupied/Available Rooms
Reflected as a percentage %
- A paid occupancy percentage of 80% indicates that 80% of the hotel rooms available to sell were sold by patrons who paid for the room
Example
Paid rooms = 2,100 Number of rooms in hotel = 80
Time Period = one month (January)
Rooms Available to Sell =
Number of Rooms in the hotel
X Number of days in either in the day, month, or year depending on the time period being reported
2,100/(80 * 31) = 2,480
= 84.67%
Sample of Average Occupancy per Room
Average Occupancy per Room: Measures the number of guest in each occupied room
Formula
Number of Guests/Number of Rooms Occupied
Presented as a number of guest
- Average Occupancy per room of 1.14 guests would indicate that in every room that is occupied (paid or complimentary) there are 1.14 guests in the room
Example
Number of Guests = 24,160
Number of Rooms Occupied = 21,160
24,160/21,160 = 1.14 guests
Sample of Seat Turnover
Seat Turnover:Measures the occupancy of a food service facility
Formula
Guests Served/Number of Seats x Number (Days Open or Hours during a meal period or hours in day)
Presented as a turnover
- A restaurant seat turnover of 1.53 times indicates that the restaurant is turning its available tables over 1.53 times per the time period being measured (i.e. day, meal period, etc.)
Example
Guests Served for Year = 56,000
Number of Seats = 100
Number of Days in the Year = 365
56,000/(100 x 365)
= 1.53 times
Sample of Inventory Turnover
Inventory Turnover: Measures efficiency of inventory management
Formula
Cost of Goods /Average Inventory
Expressed as a turnover ratio
- A food inventory turnover ratio of 12.2 times indicates that the food inventory turned over 12.2 times during the time period analyzed
Example
Food Cost 122,000
Average Food Inventory =
Beginning Food Inventory + Ending Food Inventory/2
122,000/((11,000 + 9,000) / 2)
=
12.2 times
Sample of Property and Equipment Turnover
Property and Equipment Turnover (Fixed Asset Turnover)
Assesses effectiveness in generating sales from investment in fixed assets
Formula
Total Revenue/Average Property and Equip.
Reflected as turnover ratio
- A turnover ratio of 1.68 indicates that revenue was 1.68 times the average total property and equipment
Example:
Total Revenue = 1,352,000
Average Property & Equipment* =
(Total Property and Equip. Beg of Year + Total Property and Equip. End of Year)/2
1,352,000/((809,000 + 798,300) / 2)
= 1.68 times
*Note: The Property and Equipment is net of depreciation
What are Profitablity Ratios?
Measures the overall performance and efficiency in managing assets, liabilities and equity. Some profitability ratios are based on sales and other are based on investments
Based On Income Statement:
- Profit Margin
- Gross Operating Profit
- Gross Operating Profit Per Available Room
Based on Balance Sheet and Net Income
- Returns on Assets
- Returns on Owners’ Equity
What is Profit Margin?
Profit Margin:Measures profit generated after consideration of all expenses and revenues
Formula
Net Income/ Total Revenue
Reflected as a percentage
A profit margin of 10.85% indicates that for every $1 in revenue the business kept $.1085
Example
Net Income = 146,700
Total Revenue = 1,352,000
146,700/1,352,000= 10.85%
What is Gross Operating Profit Margin?
Gross Operating Profit Margin:Measures gross operating profit which generally includes only costs controllable by management
Formula
Gross Operating Profit/ Total Revenue
Reflected as a percentage
- A Gross Operating Profit Margin of 30.73% indicates that for every $1 of revenue from operations $.3073 is available to cover fixed charges
Example
Gross Operating Profit = 415,500
Total Revenue = 1,352,000
415,500/1,352,000= 30.73%
What is Gross Operating Profit Per Available Room?
Gross Operating Profit Per Available Room (GOPPAR):Measures ability to produce profits
Formula
Gross Operating Profit/Rooms Available
Reflected on a per available room basis
- A GOP per available room ratio of $14.23 indicates that the hotel generates $14.23 in gross operating profit for every room it has available
Example
Gross Profit (GOP) = 415,500
Available Rooms = 29,200
415,500/29,200= 14.23 GOPPAR
What is Return on Assets?
Return on Assets (ROA): ROA gives an idea as to how efficient management is at using its assets to generate earnings
Net Income / Total Assets
What is Return on Owner’s Equity?
Return on Owner’s Equity
- Compares the profits of the business to the owner’ investment
- Owner’s prefer a high ratio
- Reflected as a percentage
- A ratio of 31.30% indicates that $.3130 was earned for every $1 of Owner’s Equity
What are Operating Ratios?
Assist in measuring the effectiveness of how the business is being operated
Examples:
- Mix of Sales
- Average Room Rate
- Revenue Per Available Room
- Average Food Service Check
- Food Cost Percentage
- Beverage Cost Percentage
- Labor Cost Percentage
- Revenue Per Seat Available
What is Mix of Sales?
Mix of Sales:Measures revenue by departments
Formula
Revenue for an operating segment/Total Revenue
- Different operations yield different profit margins
- Important for management to understand the impact of the mix of business to total profitability
What is Average Daily Rate (ADR)?
Average Daily Rate (ADR): Measures average rate per available room sold
Formula
Rooms Revenue/Number of Rooms Sold
$810,000/21,000= $38.57
- Does not include complimentary rooms only sold rooms
- Best comparison is to the budget or competitors
What is Revenue Per Available Room (REVPAR)?
Revenue Per Available Room (REVPAR): Measures the affect of both occupancy and rate in yielding the most per room inventory available
Formula
Rooms Revenue/Available Rooms
810,000/29,200= 27.74
It’s a comparable that can be used when looking at competitors or other hotels in the portfolio
What is Average Food Service Check?
Average Food Service Check: Measures the average revenue from each guest
Formula
Total Food Revenue/Number of Food Guests
300,000/56,000= $5.36
On average each guests spends $5.36 in food revenue at the restaurants
What is Food and Beverage Cost %?
Food and Beverage Cost %
Measures the cost of food or beverage to the revenues generated
Formula
Food or Beverage Cost/Food or Beverage Revenue
$120,000/$300,000= 40%
- Indicates that for every $1 in revenue $.40 were spent on the product that was sold
- Management should compare this to budget or an industry standard this comparable to their operation
What is Labor Percentage?
Measures how much labor costs represent in comparison to $1 of departmental sales
Formula
Total Labor Cost/Total Revenue or Departmental Revenue
- Important to hospitality industry as it is very labor intense
- The higher the percentage (i.e. expense increases), the lower the profits
