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CHAE Managerial Accounting > Managerial Accounting Concepts 2.1 &2.2 > Flashcards

Managerial Accounting Concepts 2.1 &2.2 Flashcards

1
Q

What are the 6 Branches of Accounting?

A

•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
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2
Q

Whats the difference beween Financial & Managerial Accounting?

A
  • Financial Accounting is Historical
  • Managerial Accounting provides information, enhances controls, and plans for events
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3
Q

What is Fixed Costs?

A

•Fixed Costs - Costs that are normally not affected by the changes in Sales Volume over a relevant range

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4
Q

What is Relevant Range?

A

Relevant Range - Range of activity under which cost data is valid

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5
Q

What is Variable Costs?

A

Variable Costs - Costs that are constant on a per unit basis

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6
Q

What is Mixed Costs?

A

Mixed Costs - Also called Semi-Fixed or Semi-Variable Costs and have a Fixed and a Variable Component

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7
Q

What is Controllable Costs?

A

Controllable Costs - Costs that can be changed in the short term and are under the control of an Operating Manager

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8
Q

What is Noncontrollable Costs?

A

Noncontrollable Costs - Costs that normally cannot be changed in the short run

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9
Q

What is Prime Costs?

A

Prime Costs - Material plus Labor

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10
Q

What is Unit Cost?

A

Unit Cost - Cost per Saleable Unit

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11
Q

What is Avoidable Costs?

A

Avoidable Costs - Fixed Costs that are eliminated during a shutdown

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12
Q

What is Capacity Fixed Costs?

A

Capacity Fixed Costs - Costs incurred when providing goods & services

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13
Q

What is Discretionary Fixed Costs?

A

Discretionary Fixed Costs - Costs that management can avoid

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14
Q

What is Step Costs?

A

Step Costs - Costs that change due to the changes in a range of activity

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15
Q

What are Overhead Costs?

A

Overhead Costs - All costs other than direct costs incurred by profit centers (Indirect Costs)

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16
Q

What are Differential Costs?

A

Differential Costs - Costs that differ between two alternatives

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17
Q

What are Sunk Cost?

A

Sunk Cost - A past cost relating to a past decision

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18
Q

What are Average Cost?

A

Average Cost - Cost to produce an Item (Include All Costs)

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19
Q

What are Incremental Costs?

A

Incremental Costs - How much does it costs to produce another unit (Variable Costs Only)

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20
Q

What are Standard Costs?

A

Standard Costs - What costs should be under ideal situations

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21
Q

What is Indifference Point?

A

Indifference Point - The level of activity where costs are the same under variable & fixed arrangements

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22
Q

For purposes of decision-making costs are categorized into what two basic types?

A
  • Variable
  • Fixed
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23
Q

What are examples of Variable Costs?

A

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
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24
Q

What are examples of Step Costs?

A

Step Costs:

  • Constant within a range of activities
  • But different among ranges of activity
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25
Q

What are examples of Fixed Costs?

A

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
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26
Q

What are “Other Fixed Costs”?

A

Avoidable Fixed Costs

Unavoidable Fixed Costs

Semi-variable Costs (Mixed)

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27
Q

What are Avoidable Fixed Costs?

A

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
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28
Q

What are Unavoidable Fixed Costs?

A

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
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29
Q

What are Semi-variable Costs (Mixed)?

A

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
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30
Q

Whats the formula for Total Costs?

A

Total Costs

Variable

+ Step Costs

+ Fixed Costs

+ Mixed Costs

= Total Costs

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31
Q

What are the 3 Methods of determining Mixed Cost Elements?

A

High - Low (Two Point Method)

Scattergram

Regression analysis

32
Q

How to Solve using High-Low(Two Point Method)?

A

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
33
Q

How to solve using Scattergram?

A

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
34
Q

How to solve using Regression Analysis Method?

A

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
35
Q

Sample of Scatter Graph

A
36
Q

Sample of Position Correlation

A
37
Q

Sample of Negative Correlation

A
38
Q

What is Indifference Point?

A

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
39
Q

Solve for Indifference Point

Fixed lease cost = $40,000; Variable lease cost = 2% of sales (revenue)

A

Indifference point (X) : $40,000 = 0.02X

X = $2,000,000

40
Q

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?

A

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

41
Q

Types of Cost Allocation

A

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
42
Q

Explain Horizontal Analysis

A

Horizontal Analysis

  • Compares two periods
  • Need comparative balance sheet
  • Simplest approach
  • Shows the absolute change in dollars between two periods
  • Shows percentage change
43
Q

Explain Vertical Analysis

A

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%
44
Q

Explain Ratio Analysis

A

Compare Against Something

  • Prior Period
  • Industry Standard
  • Budget
  • Ratio Analysis

Express in a Number of Ways

  • Percentage
  • Per Unit Basis
  • Turnover
  • Coverage
45
Q

2.2 Analytics has what 4 types of analysis?

A
  1. Horizontal analysis
  2. Vertical analysis
  3. Ratios analysis
  4. Variance analysis
46
Q

What are the 5 classes of Ratios?

A

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

47
Q

What is the formula for Current Ratio?

A

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
48
Q

What is the Acid Test Formula?

A

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
49
Q

Whats Accounts Receivables Turnover Formula?

A

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
50
Q

What is Average Collection Period?

A

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
51
Q

Whats Solvency Ratio?

A

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
52
Q

What are the 5 Solvency Ratios? (FOLND)

A

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
53
Q

What is Solvency

A

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

54
Q

What is Debt to Equity Ratio?

A

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
55
Q

What is Activity Ratios?

A

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
56
Q

Sample of Activity Ratio: Asset Turnover

A

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
57
Q

Sample of Paid Occupancy Percentage

A

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%

58
Q

Sample of Average Occupancy per Room

A

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

59
Q

Sample of Seat Turnover

A

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

60
Q

Sample of Inventory Turnover

A

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

61
Q

Sample of Property and Equipment Turnover

A

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

62
Q

What are Profitablity Ratios?

A

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
63
Q

What is Profit Margin?

A

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%

64
Q

What is Gross Operating Profit Margin?

A

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%

65
Q

What is Gross Operating Profit Per Available Room?

A

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

66
Q

What is Return on Assets?

A

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

67
Q

What is Return on Owner’s Equity?

A

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
68
Q

What are Operating Ratios?

A

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
69
Q

What is Mix of Sales?

A

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
70
Q

What is Average Daily Rate (ADR)?

A

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
71
Q

What is Revenue Per Available Room (REVPAR)?

A

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

72
Q

What is Average Food Service Check?

A

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

73
Q

What is Food and Beverage Cost %?

A

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
74
Q

What is Labor Percentage?

A

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
75
Q
A

CHAE Managerial Accounting (3 decks)

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