Q3: Accounting Flashcards
Profit
Measures the value that an economic activity generates
Revenues
Value of resources obtained from customers in exchange of products and/or services of the organisation
Expenses
Value of resources that the organisation consumes to generate revenues
Contribution margin = gross margin
Money left over from sales after paying all variable expenses associated with producing a product.
Price per unit -minus- Variable cost per unit.
Cost behaviour
Attempt to understand how operating costs change in relation to a change in an organization’s level of activity.
Fixed costs
Happen no matter how many products are sold
Variable costs / Kintamieji kaštai
Change with the level of activity
Semi-variable arba mixed-costs
Jei pasikeičia būdas per laiką
Relevant range
Describes the parameters of production or activity within which a company maintains the same fixed costs.
Step costs, also called stair-step costs
Costs that do not change in direct proportion to increasing levels of activity.
Discretionary costs
Avoidable costs
Committed costs
Costs that cannot be altered in the short run.
Regression
Kaip apskaičiuoti Total contribution margin?
Revenues - variable costs
Kaip apskaičiuoti contribution margin per unit
Price per unit- variable costs per unit
Kaip apskaičiuoti contribution margin ration? (%)
(revenues per unit - variable costs)/revenue = (price per unit - variable costs per unit) / price per unit
What does total contribution margin tell you
What the company generates before having to pay the fixed costs
Tai skirtumas tarp pajamų, gautų pardavus prekę, ir tiesioginių kaštų, susijusių su šios prekės gamyba ar pardavimu.
What does total contribution margin tell you on a per unit basis
How much money a company adds to its profits each time it sells a unit
What is the dream of every business person (but it’s rare)
High CM and low fixed costs
What companies generaly are high contibution margin industries?
PVZ: movie theaters, hotels, utilities, airlines
What do high fixed costs force the companies to do?
Look for high volume
Higher fixed costs are associated with what kind of business models?
Riskier
How do we get operating leverage?
Total fixed costs / total costs
Operating leverage
how much a company’s profits change when its sales change
what does high operating leverage mean?
A company has high fixed costs, so when sales go up, profits rise fast. But if sales drop, losses can be big.
what does low operating leverage mean?
A company has more variable costs, so profits grow more slowly with sales, but losses are smaller when sales fall.
Break even point
Number of units that need to be sold to have 0 profit
or
how much revenues to generate to have no loses
How to calculate break even point
1)Number of units that need to be sold to have 0 profit
VADINASI: break even point in number of units sold = fixed costs / CM per unit
or
2) how much revenues to generate to have no loses
2 VARIANTAI:
2.1) number of units at the break even point * sales price per unit
2.2) use CM ration:
break even point in euros sold= fixed costs / CM ratio (%)
Break even point chart
Vertical axis - money
Horizontal - number of units
Costs line starts on the vertical axis at the level of fixed costs and goes up at the number of units because of the variable costs.
Sales line starts at the origin and goes up at the number of units
Intersection - break even point (no profits, no loses)
How to assess how difficult reaching break even point is?
1) Compare this target with the production capacity of the business or the size of the market:
–> If the break even occurs at or near the capacity ORRRR if a large market share needs to be captured –> the strategy is called into question
2) Changing the values of the equation variables aka “sensitivity analysis” or “what if analysis”
It looks at the change in the break even point when fixed costs, variable costs and prices change (neelaboratino daugiau)
Accounting
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.
What did Charlie Munger say
“You have to know accounting. It’s the language of practical business life.”
What did Peter Krueger say
“Companies run by engineers don’t make money, but companies run by accountants don’t make anything at all.”
What is strategy?
A series of actions that help achieve one or more goals.
What does Managerial Accounting inform?
Managers’ decisions to select strategies that are most
effective and efficient to reach goals.
What is Financial Accounting
An information-processing system that generates general-purpose financial reports:
» The main focus is on external users (investors, lenders, analysts, regulators)
» Highly aggregated reports
» Governed by law and generally accepted accounting principles
» Typically prepared once a quarter or year
» Mostly based on historical cost (recording past transactions)
What is Managerial Accounting?
An information-processing system that provides managers and other employees with financial reporting information and control to assist in the formulation and implementation of an organization’s strategy.
- The main focus is on internal users (managers, employees)
- Reports are based on information demand of information users
- Not constrained by external reporting rules
- Typically prepared frequently (daily, weekly, monthly, quarterly)
- Mostly based on estimated cost (oriented at the current or future decisions)
Vieneto kintamieji kaštai
Tai kaštai, kurie tenka vienam pagamintam vienetui ir keičiasi tiesiogiai priklausomai nuo pagamintų vienetų skaičiaus.
Pavyzdys: Jei gaminant vieną papildomą prekę kaštai siekia 5 USD, tai vieneto kintamieji kaštai bus 5 USD.
Nuo ko pagrinde priklauso revenues?
Nuo maqrket conditions
3 būdai kaip pateikiama contribution margin
- Absolute amount of money
- CM per unit
- % of revenues (CM ratio)
What is one way to assess how difficult reaching break-even point is.
Comparing break even point target with the size of the market or the production capacity of the business
What if annalysis or sensitivity annalysis
Looks at change in the break even point when the variable values change - fixed, variable and prices change
high low method
The high-low method is a simple way to estimate fixed and variable costs by using the highest and lowest activity levels within a given period.
depresiasion part of erxpense or cost?
expense
assets over time become expenses though
depreciation
death spiral
dividing fixed costs by volume leads to a costs per unit that’s too high. this huihger ciost iwll lead to higher prices ancd they will lead to lower volume, raising costs again will lead to pricing products out of the market. TO AVOID: divide fixed costs by the capacity that these fixed costs provide and NOT BY VOLUME
TRACE = ASSIGN = ALLOCATE
same meanign in management
1st component of the costs system
variable cost of unit
- compoennt of cost system
fixed cost per unit, estimated as the division manaufacturing fixed cots by volume
adding variable and fixed costs (both per unit) =
full cost of a unit
how to avoid the risk of a death spiral
the volume used as the denominator shpould equal the practical cvapacity of the fixed recourced. A constand denomiantor leads to a constant fixed cots per unit.
Practical capacity
maximum output or production level that an organization, machine, or system can achieve under normal operating conditions, taking into account realistic constraints like maintenance, downtime, employee breaks, and other operational inefficiencies.
if volume produced is lower than the practical capacity, then you have a cost of
excess capacity
duced
double declining balance method (DDB)
an asset depreciates faster in the earlier years of its useful life. The method calculates depreciation by applying twice the straight-line depreciation rate to the asset’s book value at the beginning of each period.
decrlining balance method is best for?
companies that experience a quicker asset value decrease in early life stages
units of production (activity) method
depreciation method that allocates the cost of an asset based on its usage, production, or activity level, rather than the passage of time. This method is ideal for assets whose wear and tear is more closely related to how much they are used or the amount of output they generate, such as machinery, vehicles, or equipment in manufacturing.
To expense equipment means
treat the cost of the equipment as an expense in the financial statements, rather than capitalizing it as an asset.
Capitalizing vs. Expensing:
Capitalizing an asset means recording its cost as an asset on the balance sheet, and then gradually allocating that cost as depreciation over time.
Expensing the equipment means treating the full purchase price as an immediate expense on the income statement for the period in which it was purchased.
residual value
also known as salvage value, is the estimated amount that an asset is expected to be worth at the end of its useful life, after accounting for depreciation.
If the employee is evaluated based solely on the variable cost per unit, their incentive to increase production might
decrease because variable costs typically do not decrease as dramatically as fixed costs. The more units they produce, the less the impact on variable costs, so they might not see as much benefit from producing more units from a cost perspective alone.
How to set product price
The selling price should cover at least the total manufacturing cost and ideally include a profit margin. So, the minimum selling price should be €440 per jacket.
revenue producing activities of organisations
servise, merchandising, manufacturing
types of costs
product costs and period costs
product costs
all produyction costs necessary to get products ready to sell / cots related to manufactoring.
period costs
all costs other than product costs / costs not realated to manufacturing (everything else). these are always expensed
costs are clasified based on what
whether or not they are related to the production process
COGS
Cost of Goods Sold
gross profit
profit before period costs
operating income (profit from operations) =
gross profit - period costs
net income = net profit, yes or no?
yes
assets, liabilities, and equity
three fundamental components that make up a company’s balance sheet.
Equity
also known as owner’s equity or shareholders’ equity, represents the residual interest in the assets of a company after deducting liabilities. In simple terms, it is what the owners (shareholders) own after all debts have been paid. It reflects the net worth of the company.
Assets=
Liabilities+Equity
Accounts receivable
money that a company is owed by its customers for goods or services that have been delivered or provided but not yet paid for.
Retained earnings represent what?
accumulated profits that a company has earned over time but has not distributed to shareholders as dividends.
cost of materials is generally variable or fixed?
variable
product costs only become expenses when…
finished products are sold
types of inventory
1) raw materials
2) work in progress
3) finished good (when these are sold they become expenses as cost of goods sold)
inventory definition
the goods and materials that a business holds for the purpose of resale or use in the production of goods to be sold. It is considered a current asset on the balance sheet because it is expected to be sold or used up within a year or during the normal course of business.
gross profit or gross margin =
revenues - cost of goods sold (often reported as % of revenues)
current assets are
assets that do not stayi n the company for long, include that become cash through day to day activities or are already cash - pvz dalykai kaip accoutns receivable, iunpaid bills for services or goods sold and inventories and cah itself
non-current or fixed assets are
those that stay in the company for ore than a year such as equipment, computer or facilities (they typically loose value though depreciation)
fixed assets associated with production become
product costs though depreciation (the dep of machine is a product cost that goes into the cost of a product)
what does income statement say
if company captures a good share of the value it creats and amkes a profit
what doe sincome statement describe
hwo profits are generated over a period
cash flow statement is calculated how?
cash flowing in - cash flowing out
divestment
meaning
pardavimas
BALANCE SHEET MEANING
1) describes what your company own (assets)
2) how it financed what it own (liabilities and shareholder equity)
the difference between both is called equity -> the net worth to owners
assets are categorised into
current and fixed
types of liabilities
1) short term (due in less than 1 year)
2) long term (more than 1 year)
return on assets
profit before interest expenses over total assests
return on equity
net profit divided by equity
roi is
return on investment defined as profit / investment (%)
ROA
return on assets = profit before taxes / assets. indivaces whether company provides a good return on its assets
ROE =
= net profit / equity. evaluates financial performance from oweners perspective
residual income
profit - (investment * cost of capital) is absolute number
cost of capital is
the rate of return an investor foregoes or the opportunity cost when investing in the company
gross profit rate
(net sales - COGS) / NET SALES
net sales are
total revenue a company generates from selling goods or services after accounting for returns, allowances, and discounts.
accounting for inventories two parts:
perpetual inventory system and periodic
perpetual inventory system
continuous, detailed recording of quantities purchased and associated costs sold
periodic inventory system
not detailed, inventory is counted and priced periodically (at the end of the financial year)
periodic method
a system used in inventory management and accounting to track the inventory and calculate the cost of goods sold (COGS) over a specific period, rather than on a continual basis.
fifo method
(First-In, First-Out) The first units purchased or produced are assumed to be the first units sold. This means that the oldest inventory items are sold or used first, while the newer inventory items remain in stock.
performance object is
specific aspect of the company that managers need to focus their attention on to meet their business goals. ex. products and services
DIRECT COSTS
DIRECTLY ALLOCATED TO A PERFORMANCE OBJECT. EXCLUSIVELY - MATERIALS AND DIRECT LABOUR
INDIRECT COSTS
CANNOT BE ALLOCATED DIRECTLY. REST OF RECOURCES THAT ARE SHARED
PROFITABILITY =
REVENUES OF OBJECT- COSTS OF OBJECT
OVERHEAD COSTS
costs of resources other than material and
direct labor. They are often indirect costs.
KA PIRMA SORTINAM INDIRECT AR DIRECT I COST POOLS
INDIRECT
cost pool
is a combination of various indirect costs that have a similar cost behavior.
Allocation bases
trace the indirect costs accumulated in cost pools
to performance objects. include cost of directmaretials or labour, number of hours of direct labour, number of machine hours, sq meters of manufacturing space.
allocation rates =
amount of costs in a cost pool / by the amount of allocation base (the actual volume for variable costs and the normal capacity for fixed costs)
if indirect costs are fixed
the volume to estimate the allocation rates has to be normal capacity so that it doesnt lead to a death spiral
job order costing system
each order has very different features and costs
process costing system assumes that
all units produced are the same in terms of features, recources consumed and costs or if there is a variation it’s very small. USED WHEN PRODUCTS ARE PRODUCED IN A CONTINUOUS MANUFACTORING ENVIRONMENT
equivalent units
used to take into account units that are work in progress at the end of a period.
If a unit is half way through a process, it is counted as half an equivalent unit.
cvp
cost-volume-product analysis for a time period
Strategic Cost Management
Making decisions concerning specific cost drivers within the context of an organization’s business strategy and value chain:
*
Ensures that you plan for competitive and efficient production from the start.
Value chain stretches from the development and use of resources to final customers.
Profit =
otal revenues -Total costs
Total costs =
Total costs = Fixed cost+ unit variable cost x
Total revenues =
unit selling price x Unit sales = px
sensitivity analysis can be used for and means
forcasting and means how does profit change when one or more parameterschange
Cost-Volume-Profit Analysis
CVP assumptions (5)
- All costs are classified as fixed or variable.
- The total cost function is linear within the relevant range.
- The total revenue function is linear within the relevant range. 4. The analysis is for a single product.
- There is only one activity cost driver: unit or euro sales volume.
Using the profit formula
Steps:
- Separate all costs into variable and fixed components
- Determine the nature of costs: direct or indirect
In order to calculate the profitability of a performance object, we need to trace costs to that performance object!
Selecting a Cost Driver
Cost drivers should pick up movements in manufacturing costs:
*
Cost drivers are used to assign overhead costs.
For instance, direct labor hours
Potential flaws:
Units requiring extensive manufacturing (but little direct labor) activity have too little cost assigned -> robotic manufacturing. Units requiring little manufacturing activity (but much direct labor) have too much cost assigned
Solution
Use a predetermined manufacturing overhead rate.
Using Predetermined Overhead Rates
Management can use different commonly used cost drivers:
* Predicted total direct labor hours
* Predicted total machine hours
Calculating the predetermined rate using direct labor hours:
Predicted total manufacturing overhead cost for the year Predicted total direct labor hours for the year
The predetermined overhead rate uses predicted amounts as actual amounts are unknown.
Overhead rates
are used to allocate indirect costs (also known as overhead) to specific products, services, or departments within a company. These rates help businesses assign a portion of the total overhead costs to individual units of output, based on certain cost drivers, allowing for more accurate cost estimation and pricing.
Overhead costs typically include things like:
Rent
Utilities
Salaries of non-direct employees (e.g., administrative staff)
Depreciation of equipment
Maintenance costs
Insurance
Production scheduling depends on
which production method is used.
Job Order Production
- Products are manufactured in single units or in batches of identical units
Process Manufacturing
- Identical units are produced on a continuous basis. Can be one product or a set of closely related products
IN PROCESS COSTING: Determining the cost of a sinale unit:
Equal to total product costs assigned to a “process” or “department” during a period divided by the number of units produced during the period
relevant costs
future cash flows that differ between alternatives
sunk costs
jau isleisti pinigai, ne in the future
discretionary costs
training, marketing, krc easy to adjust, nera kad prirista prie kazko
engineered costs
certain cost comes with automatic decision. It is a result of an output decision. You cannot make that decision about increasing that output without incurring these costs.
* For example, if Larry needs 10 minutes to
produce a chair and you want to produce more
chairs, your labor time (and cost) will increase.
INVENTORY TYPES
- RAW MATERIALS
- wip beggining and ending
- finished goods
standard costs
estimates of actual costs based on opast experience and expectations
financial plan is aka and its parts:
budget
1. profit plan
2. investment plan
3. cash plan
profit plan
planned residual income =
planned profit - (planned investment * cost of capital)
cash flow plan
cash in n out during period. neuztenka per metus plano, reikia bent per month o galimai net weeks jei mazai cash - SHORTER PERIODS OF TIME
liquidity crisis
no cash and scheduled cash outflow
cash cycle pradzia ir pabaiga
nuo pirktu materials delivery iki customers sumokejimo
Special Orders
When a customer wants to buy a product or service on a “one-time” basis at a “special” price.
What is relevant?
Sales revenue?
Variable production costs?
Additional costs to be incurred?
Over- and Under-Applied Overhead
- Exists because the amount of overhead applied is likely not the same amount as the overhead incurred
- Balance in Manufacturing Overhead at end of period is the over- or under- applied amount
- Must be eliminated at year end
- Transfer to cost of goods sold
Equivalent Completed Units
Refers to the number of completed units that is equal, in terms of production effort, to a given number of partially completed units.
Example:
* Assume 90 units in the ending inventory are 40% complete.
* Equivalent units = 90 units in ending inventory x 0.40 = 36
Material costs are inccured primarily when
at the beginning
Conversion costs are inccured when
throughout the process
product costing
links financial and managerial accounting Cost-based valuations are required for financial reporting Product costing provides vital information to managers
* To set prices
* To control costs
* To evaluate management performance
absobtion or full costing
Product costs consist of…
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
variable costing
Direct materials
Direct labor
Variable manufacturing overhead
manufactoring overhead
the sum of all the indirect costs which are incurred while manufacturing a product.
inventory costs differ onyl by
FIXED manufactoring overhead
budgeting approaches
Output/Input Approach
Activity-Based Approach
Incremental Approach
Minimum Level Approach
Output/Input Approach to Budgeting
- Budgets physical inputs and costs as a function of planned input (unit-level) activities
- Starts with planned outputs and works backward to budget inputs
- Often used for service, merchandising, manufacturing, and distribution activities
- Works effectively with activities that have defined relationships between effort and accomplishment
Activity-Based Approach to Budgeting
Type of output/input method
* Emphasis placed on the expected costs of the planned activities that will be consumed
* Budgeted costs are computed as the projected use of each activity
multiplied by the cost per unit of the activity.
Startups choice
Incremental Approach to Budgeting
Budgets costs for a coming period as a dollar or percentage change from the amount budgeted for a previous period
* Used when relationship between inputs and outputs is weak or nonexistent
* Widely used in government and not-for- profit organizations
Minimum Level Approach to Budgeting
Establishes a base amount for budget items and requires explanation or justification for any budgeted amount above the minimum base
Questions the necessity for costs included in the base budget of the incremental approach
* Very time consuming
* Zero-based budgeting
- Every euro of expenditures must be justified
* Breaks total budget into program packages with related costs
Purchases Budget
Forecasts the merchandise to be purchased to meet sales needs and ending inventory requirements
* Inputs to consider:
* Budgeted sales
· Desired ending inventory
· Planned beginning inventory
Cash Budget
*Summarizes all cash receipts and disbursements expected to occur during the budget period
Because of issues related to the timing of sales and collections on account
*Collections on sales may not equal sales revenue
Because of issues related to the timing of payments for purchases and other expense items
·Disbursements (payments) may not equal expenses
static budget is a
financial plan set before a specific period, such as a month or a year, using predicted amounts based on historical data and assumptions about the future.
the learning curve
the unit cost decreases everytime cost per unit doubles
ABC SYSTEM
activities and causality of costs. distinguishes:
1. reflect activities, proceses and links indirect costs to activities
* It is a different approach compared to traditional volume-based cost systems
* It takes complexity into account
* Involves determining the cost of activities and tracing their costs to a cost object on the basis of the cost object’s use of the activity
* Underlying premises
* Activities drive costs
* Costs should be assigned to products/services in proportion to the volume ofactivities they consume
TYPES MADE UP OF:
UNIT LEVEL ACTIVITIES,
BATCH LEVEL ACTIVITIES,
PRODUCT AND CUSTOMER LEVEL ACTIVITY
FACILITY SUSTAINING ACTIVITIES - on the decision to be in business
Traditional cost systems tend
to underestimate the costs of low-volume products and overestimate the costs of high-volume products.
Product Development Process
- Market Research activity: Conducting surveys, focus groups, competitor analysis
- Design and Prototyping activity: Sketching product designs and creating prototypes
- Testing activity: Testing of the prototypes to ensure safety, usability, and quality
Two main types of activities: operational and support
- Operational activities transform inputs into outputs that customers value.
Examples: manufacturing, services, sales, logistics, the development of new
products, purchasing inputs, marketing, and providing after-sales services. - Support activities serve operational activities.
Examples: activities in human resources departments, recruiting, and training.
Cost Objects
- A product or service provided to a customer
- A revenue-producing event for which management wants to know the cost
In a one-stage system,
indirect resources are assigned to operating activities that
are then allocated through cost drivers to the performance
objects.
In a two-stage system,
indirect resources are
allocated to either support or operating activities, much
like in a one-stage system. But then, support activities are
allocated through cost drivers to operating activities. The
last step, as in the one-stage system, allocates operating
activities to performance objects.
TARGET COSTING
technique to move cost management to the design stage.
Kaizen costing
Kaizen
recognizes that there is constant improvement in costs and
that budgeted costs are not a good benchmark; instead, a
lower one that considers expected improvements is more
appropriate.
customer profitability
The only difference is that the performance object is the
customer or customer segment rather than the product.
the whale curve
This graph frequently proves that companies have
heterogeneous client portfolios. Often, the distribution
of revenues and profits fits the 80/20 rule, whereby the
company makes 80% of its revenues or profit from 20% of its
customers. Typically, italso reveals that a profitable company
is making money with one group of customers and losing
money with another large group of customers.
transfer price
internal value assigned to a product or service that one division provides to another
cost of quality
(1) Prevention costs are the costs of producing quality the first time around. They include issues such as training people how to provide a service or assemble a product; designing a product that is easy to manufacture or service; working closely with suppliers to insure a smooth interface; and holding meetings to find new ways to improve quality.
(2) Appraisal costs are the costs of testing whether products and services have the promised quality. While prevention costs are inputs to quality, appraisal costs are incurred at the end of a process. For instance, while training a supplier is a prevention cost, testing the quality of the supplier’s products is an appraisal cost. The most common appraisal costs go into quality control procedures such as testing parts and the final product. Testing blocks poor-quality items from reaching the customer and also represents additional costs that companies incur as they strive to deliver quality.
(3) Internal failure costs are the costs of having to rework products and services flagged during quality-control procedures. Rejected products have to be scrapped (at a cost), reworked, re-inspected, or sold at a discount (as damaged goods). High prevention costs often correspond directly with lower internal failure costs because careful production leads to better quality. Internal failure costs can be quite expensive
in complex products such as cars.
(4) External failure costs are the costs incurred when the product or service fails while in the customers’ hands. There are cash costs associated with external failure,
such as having to service a product under warranty. But most external failure costs are opportunity costs that the company does not see: the costs of unsatisfied customers
bad reputation. In the short term, these costs do not affect the company’s or performance, but in the long term, they can drastically reduce sales.
