Managerial Accounting Concepts

Question 1

Internal Reporting

Answer 1

An accounting system that gives managers information needed for daily operations and also for long-range planning

Question 2

Managerial Accounting

Answer 2

• Internal: For managers, executives, employees
• No regulations, requirement is determined by management
• More subjective and judgmental; valid, relevant, accurate
• Current and future oriented

Question 3

Financial Accounting

Answer 3

External: For creditors, stockholders, tax authorities

• Regulated by GAAP
• Objective, reliable, consistent
• Historical

Question 4

Cost Behavior

Answer 4

how much cost will react or change as the level of business activity changes

Question 5

Variable costs: In Total

Answer 5

Total variable cost changes as activity level changes

Question 6

Variable Costs: Per Unit

Answer 6

Variable cost per unit remains the same over wide ranges of activity

Question 7

Fixed Costs: In Total

Answer 7

Total fixed costs remains the same even when the activity level changes

Question 8

Fixed costs: Per Unit

Answer 8

Fixed cost per unit goes down as activity level goes up

Question 9

Product Costs

Answer 9

• Costs assigned to goods produced
• Include direct material, direct labor and manufacturing overhead
• Assets

Question 10

Period Costs

Answer 10

• Include administrative, marketing and selling costs

- Expenses incurred

Question 11

What are the manufacturing costs?

Answer 11

Direct material, Direct labor, and Manufacturing overhead

Question 12

Direct Materials

Answer 12

The costs of all materials and parts that are directly and conveniently traced to items produced
Ex: Wood, parts, motors, and a variety of other items.

Question 13

Direct Labor

Answer 13

The cost of labor that is directly and conveniently traced to items produced by labor
Ex: Labor costs of workers directly involved in production

Question 14

Manufacturing Overhead

Answer 14

Indirect materials, indirect labor, all costs associated with manufacturing the goods other than direct materials and labor.
Ex: amortization of tools and buildings, utilities

Question 15

Non-Manufacturing Costs (Period Costs)

Answer 15

a. distribution costs involved in delivering finished products to customers
b. marketing: advertising, and promotion expenses
c. General and administration costs

Question 16

Overhead Allocation Rate

Answer 16

Overhead Allocation rate = Overhead Costs / Allocation Base

- Allocation Base: direct labor hours, direct labor costs, machine hours, direct material costs

Question 17

Predetermined Overhead Rate

Answer 17

Best way of assigning overhead costs to a specific job to establish an overhead rate in advance

Question 18

Overhead Application Rate

Answer 18

Used to assign a reasonable portion of factory overhead costs to each job

Question 19

Budgeted Overhead

Answer 19

Estimated expected total overhead costs for the year

Question 20

What is the predetermined overhead application rate equal to?

Answer 20

Budgeted overhead divided by the allocation base

Question 21

Overhead rate

Answer 21

Estimated overhead costs/ Quantity of the allocation base

Question 22

Manufacturing Overhead Costs

Answer 22

Sum of the overhead rate multiplied by the number of hours

Question 23

Underapplied Manufacturing Overhead

Answer 23

If actual > applied, Debit balance results

Question 24

Overapplied Manufacturing Overhead

Answer 24

If actual

Question 25

Activity-Based Costing (ABC)

Answer 25

Identification of costs by activities. Helps assign overhead costs based on the amount of overhead each product truly cosumes

Question 26

Two stages of ABC

Answer 26

1. Identifies activities and assigns the overhead costs on the basis of activities that have consumed resources 2. Costs are allocated from each activity-cost pool to each product line in proportion to the amount of products consumed by the product line

Question 27

Break-even point definition

Answer 27

The point where total sales revenue equals total costs (variable and fixed) or the point where the total contribution margin equals total fixed costs

Question 28

Contribution margin apporach in units

Answer 28

Break-even point (in units) = Fixed costs / unit contribution margin

Question 29

Contribution margin approach in sales dollars

Answer 29

Break-even point (in sales dollars) = Fixed costs / Contribution margin ratio

Question 30

Profit

Answer 30

= Total Revenue - Total Costs

Question 31

Total Revenue

Answer 31

= Unit Sales Price x Sales Volume in units

Question 32

Total Costs

Answer 32

= Variable Costs + Fixed Costs

Question 33

Variable Costs

Answer 33

= Unit Variable Costs x Sales Volume in Units

Question 34

Fixed Costs

Answer 34

= Total fixed costs

Question 35

What is the area between the fixed cost line and the total cost represent?

Answer 35

The total variable cost in dollars for all levels of output

Question 36

What is the area between the total revenue line and the total cost line to the left of the break even point?

Answer 36

It represents to losses

Question 37

What is the break even point?

Answer 37

The intersection between total sales and total costs

Question 38

What is the area to the right of the break even point?

Answer 38

It represents the profit

Question 39

Target Net Profit

Answer 39

The targeted amount of income the company would like to earn

Question 40

What is used to determine the sales volume needed to achieve the planned target in units?

Answer 40

Cost-volume-profit analysis (Contribution margin approach) and the Profit volume graph

Question 41

What is the equation used to calculate the targeted income?

Answer 41

Units of sales to realize targeted income = (Fixed costs + target income) / Contribution margin per unit

Question 42

Formula of Contribution Margin

Answer 42

Sales - Variable costs

Question 43

What is used to determine the sales volume needed to achieve the planned target in dollars?

Answer 43

Dollar of sales to realize targeted income = (Fixed costs + targeted income) / Contribution margin ratio

Question 44

Formula of Contribution Margin Ratio

Answer 44

(Sales - Variable Costs) / Sales or Contribution Margin / Sales

Question 45

What is the Margin of Safety?

Answer 45

It is the excess of budgeted sales over the break-even sales.

Question 46

Margin of Safety Formula in Dollars

Answer 46

Total Sales (or Budgeted Sales) - Break-Even Sales

Question 47

Margin of Safety Formula in Units

Answer 47

Sales Units - Break-Even Units

Question 48

What is Cost Structure?

Answer 48

Refers to the relative proportion of fixed and variable costs existing in an organization.

Question 49

What is Operating Leverage?

Answer 49

The measure of the extent to which fixed costs are being used in an organization. It measures the sensitivity of profits to changes in sales

Question 50

Formula of Operating Leverage Factor

Answer 50

Contribution Margin / Income from Operation

Question 51

What does the Operating Leverage do?

Answer 51

It helps predict how much profit chages due to changes in sales

Question 52

What does a greater operating leverage mean?

Answer 52

It means that the lager the increase in profits as sales rise, and the greater the loss as sales fall

Question 53

How do we identify Revenue Expenditures and what should be done?

Answer 53

If the expenditure benefits solely the current period, then it should be expensed immediately

Question 54

How do we identify Capital Expenditures and what should be done?

Answer 54

If the expenditure benefits multiple periods, then is should be placed on the balance sheet and then allocated to the income statements for the periods it benefits.

Question 55

What is the Make or Buy Decision?

Answer 55

It is a decision used to determine whether it is more advantageous to purchase an item outside the company or make it internally. Comparing and contrasting the costs of making internally and buying it from another company.

Question 56

What is the Drop or Retain Decision?

Answer 56

It is a concept regarding whether a segment of business should be continued or not